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 as a result of the selection of industries that survive international competition. The latter is the rise in the weight of exporting industries in production, owing to the reallocation of workers from non‐exporting industries. This decomposition, which is hard to calculate in the general case, simplifies dramatically with Fréchet‐distributed efficiencies, providing easy‐to‐quantify model‐based measures of these two effects. Selection (reallocation) turns out to matter mostly when welfare gains are small (large).