Trade, multinational production, and the gains from trade

"Much attention has been devoted to the quantification of the gains from trade. In this paper our goal is to quantify the gains from openness, which includes trade as well as other ways in which countries interact. We focus on trade and multinational production (MP), which in 2007 was almost twice as large as trade flows. We present and calibrate a model where countries interact through trade as well as MP, and then quantify the overall gains from openness and the role of both of these channels in generating those gains. The model captures several dimensions of the complex interaction between trade and MP: trade and MP are competing ways to serve a foreign market; MP relies on imports of intermediate goods from the home country; and trade and MP are intimately linked when multinationals' foreign affiliates export part of their output. The calibrated model implies that while the gains from trade are around twice the gains calculated in trade-only models, the gains from MP are a bit lower than those calculated in MP-only models"--National Bureau of Economic Research web site.