Still taking kind of an emotional vacation from current political madness. Following up on my skeptical post on worries about slowing trade growth, I wondered what a state-of-the-art model would say.

The natural model to use, at least for me, is Eaton-Kortum (pdf), which is a very ingenious approach to thinking about multilateral trade flows. The basic model is Ricardian — wine and cloth and labor productivity and all that — except that there are many goods and many countries, transportation costs, and countries are assumed to gain productivity in any particular industry through a random process. They make some funny assumptions about distributions — hey, that’s kind of the price of entry for this kind of work — and in return get a tractable model that yields gravity-type equations for international trade flows. This is a good thing, because gravity models of trade — purely empirical exercises, with no real theory behind them — are known to work pretty well.

Their model also yields a simple expression for the welfare gains from trade (p. 15):

Real income = A*(1-import share)^(-1/theta)

where A is national productivity and theta is a parameter of their assumed random process (don’t ask); they suggest that theta=4 provides the best match to available data.

Now, what I wanted to do was apply this to the rapid growth of trade that has taken place since around 1990, what Subramanian calls “hyperglobalization”. According to Subramanian’s estimates, overall trade in goods and services has risen from about 19 percent of world GDP in the early 1990s to 33 percent now, bringing us to a level of integration that really is historically unprecedented.

There are some conceptual difficulties with using this rise directly in the Eaton-Kortum framework, because much of it has taken the form of trade in intermediate goods, and the framework isn’t designed to handle that. Still, let me ignore that, and plug Subramanian’s numbers into the equation above; I get a 4.9 percent rise in real incomes due to increased globalization.

That’s by no means small change, but it’s only a fairly small fraction of global growth. The Maddison database gives us a 45 percent rise in global GDP per capita over the same period, so this calculation suggests that rising trade was responsible for around 10 percent of overall global growth. My guess is that most people who imagine themselves well-informed would give a bigger number.

By the way, for those critical of globalization, let me hasten to concede that by its nature the Eaton-Kortum model doesn’t let us talk about income distribution, and it also makes no room for the possible role of globalization in causing secular stagnation.

Still, I thought this was an interesting calculation to make — which may show more about my warped sense of what’s interesting than it does about anything else.