Gains from trade, illustrated

Dream academic paper of the day, by Assaf Zimring. A perfect article to teach to introductory students.

Gains from Trade: Lessons from the 2007-2010 Gaza Blockade

This paper uses detailed household expenditure and firm production data to study the welfare consequences of the blockade on the Gaza Strip between 2007 and 2010. Using the West Bank as a counterfactual, I find that being removed from world markets reduced welfare by 17%-28% on average. Moreover, households with larger pre-blockade expenditure levels experienced disproportionally larger welfare losses. These effects are substantially larger than the predictions of standard trade models. I show that this discrepancy is due to a combination of resource reallocation and reduced productivity. Using firm level data I find that the blockade triggered reallocation of workers across firms and sectors, especially from manufacturing and into services, and from industries that use imported inputs intensively, or export. In addition, labor productivity fell sharply by 24%-29%. This decline was however significantly higher in manufacturing (45%) than in services (5%).