"Once-off" and Continuing Gains from Trade

Abstract

Most economists are familiar with the static or once-off welfare gains created by opening an economy to trade. Much less is known about how the resource reallocations necessitated by this move affect long-run growth, and hence whether they provide dynamic or continuing welfare gains in future periods. This paper employs a dynamic trade model to provide a decomposition of the gains from trade into once-off' and continuing categories. In one version of the model, trade is always welfare enhancing; in the other, once-off losses may occur alongside dynamic gains. In both versions the magnitude of once-off and continuing effects are related to absolute and relative country size, similarity in production structures, rates of time preference, and the productivity of RD moreover, I link the magnitude of these gains to absolute and relative country size, similarity in production structures, the productivity of R&D, and the strength of time preference. I address these questions within the growth model developed in Taylor (1991). The model is created by imbedding the one-factor Quality Ladders model of Grossman and Helpman (1991a) within the continuum model of Dornbusch, Fischer and Samuelson (1977).' Because of the model's features, comparative and absolute advantage play a leading role in determining the size of both once-off and continuing gains from trade. Because of the model's endogenous growth features, access to larger world markets and trade-induced specialization in spurs economic growth. I use two versions of the basic model to examine the positive and normative consequences of international trade. In the Footloose R&D version I show that free trade is always preferred to autarky because trade creates both an immediate and onceoff level rise in instantaneous utility and an increase in its long-run rate of growth. In the Traditional Ricardian version I show that immediate and once-off losses may occur, but provide conditions under which there is a strong presumption in favour of overall gains. Recent work in this area has only considered the welfare consequences of a marginal movement towards autarky from free trade via small tariffs (Grossman and Helpman