Unbalanced trade

Description

We incorporate trade imbalances into a quantitative model of bilateral trade in manufactures, dividing the world into forty countries. Fitting the model to 2004 data on GDP and bilateral trade we calculate how relative wages, real wages, and welfare would differ in a counterfactual world with all current accounts balancing. Our results indicate that closing the current accounts requires modest changes in relative wages. The country with the largest deficit (the United States) needs its wage to fall by around 10 percent relative to the country with the largest surplus (Japan). But the prevalence of nontraded goods means that the real wage in Japan barely rises while the U.S. real wage falls by less than 1 percent. The geographic barriers implied by the current pattern of trade are sufficiently asymmetric that large bilateral deficits remain even after current accounts balance. The U.S. manufacturing trade deficit with China falls to $65 billion from its 2004 level of $167 billion.

Subjects

Series Statement

• NBER working paper series -- no. 13035.
• Working paper series (National Bureau of Economic Research) -- working paper no. 13035.

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Other Editions

• Unbalanced tradeNational Bureau of Economic Research2007-01-01
• Unbalanced tradeElectronic resourceNational Bureau of Economic Research2007-01-01