Production, Trade, and Cross-Border Data Flows

We build a two-country general equilibrium model to explore the effects of cross-border data flows in the short run. Data are generated as the byproducts of consumption, and can be used both domestically and in foreign countries at the expense of potential privacy issues, correspondingly. Intermediate good producers then use data as a new factor, in addition to labor and capital in production. We focus on the unique behaviors of data in international trade and find that firms tend to use larger quantities of data with lower privacy costs, which pushes the welfare level higher as data become important. However, when the contribution of data is not so significant, trading data may be undesirable. Moreover, from the transition dynamics, the cyclicity of data flows becomes reversed as we shift from a closed model to open economies. This paper provides an initial perspective on data factor in the international context