Deconstructing the Gains from Trade: Selection of Industries vs. Reallocation of Workers

In a Ricardian model with general distributions of industry efficiencies, the welfare gains from trade can be decomposed into a selection and a reallocation effect. The former is the change in average efficiency due to the selection of industries that survive international competition. The latter is the rise in the weight of exporting industries on total production owing to the reallocation of workers from non-exporting industries. Measuring the two effects is difficult in the general case, but the calculations become much simpler when using Fréchet-distributed efficiencies, providing easily quantifiable model-based measures of the two effects. The selection (reallocation) effect appears to be most significant when welfare gains are small (large).