Gravity, Productivity and the Pattern of Production and Trade
Anderson, James. “Gravity, Productivity and the Pattern of Production and Trade”. Boston College Working Papers in Economics 700, 2008.
The aggregated incidence of bilateral trade costs is derived from the gravity model. Incidence is equivalent to a TFP penalty. Sectoral and national differences in TFP have sharp implications for the equilibrium pattern of production and trade in a specific factors model of production. Unskilled labor is intersectorally mobile. Skilled labor acquires sector specific skills. Productivity shocks cause incidence shock that induce ex post inefficient allocation of skilled labor. Below (above) average TFP sectors produce less and have below (above) average skill premia. Ex ante efficient allocation is lower in sectors with riskier TFP incidence, despite risk neutrality.