Trade models and macroeconomics

This paper discusses some macro links that are missing from trade models. A multicountr y macroeconometric model is used to analyze the effects on the United States of increased import competition from China, an experiment that is common in the recent trade literature. In the macro stor y a fa l l in Chinese export prices is stimulative. Domestic prices fall, which increases real wage rates and real wea l t h , which increases household expenditures. Trade models do not have these channels, and they likely overestimate the negative effects or underestimate the positive effects on total output and employment from increased Chinese import competition. They lack some important aggregate demand channels.