Spatial Correlation, Trade, and Inequality : Evidence from the Global Climate

This paper shows that greater global spatial correlation of productivities can increase cross-country welfare dispersion by increasing the correlation between a country's productivity and its gains from trade. We causally validate this prediction using a global climatic phenomenon as a natural experiment. We find that gains from trade in cereals over the last half-century were larger for more productive countries and smaller for less productive countries when cereal productivity was more spatially correlated. Incorporating this role for spatial interdependence into a projection of climate-change impacts raises projected international inequality, with higher welfare losses across most of Africa.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at "http://www.nber.org/papers/w25447"