MEASURABLE DYNAMIC GAINS FROM TRADE

Productive factors, such as human and physical capital, accumulate, and trade policy can affect their steady-state levels. Consequently, in addition to the usual static effects, trade liberalization has dynamic effects on output and welfare as the economy moves to its new steady state. The output impact of this dynamic effect is measurable and appears to be quite large. The welfare impact of this dynamic effect is also measurable. The size of this dynamic gain from trade depends on the wedge between social and private returns to capital. Rough numerical estimates of the output and welfare effects are provided.