Trade Models, Trade Elasticities, and the Gains from Trade

Abstract

We argue that the welfare gains from trade in new models with micro-level margins exceed those in frameworks without these margins. Theoretically, we show that for fixed trade elasticity, different models predict identical trade flows, but different patterns of micro-level price variation. Thus, given data on trade flows and micro-level prices, different models have different implied trade elasticities and welfare gains. Empirically, models with extensive or variable mark-up margins yield significantly larger welfare gains. The results are robust to incorporating into the estimation moment conditions that use trade-flow and tariff data, which imply a common trade elasticity across models.

New Trade Models, New Welfare Implications

“…In this more general setting, the welfare gains depend on the same two aggregate moments (the domestic trade share and trade elasticity) as in ACR (28), but also on the change in firm size (captured in (29) by the total fixed costs paid by the representative firm). This change in firm size is an observable empirical moment, but one that characterizes a change in micro structure.…”

Comparative Advantage in Innovation and Production

“…The second column of the table shows the results obtained using the method of moments estimator b 1 . As expected, the estimated value of goes down, with a 3 9 When the context is clear, I use the word relative when referring to the log-double ratios de…ned in (33), so that Intuitively, a higher relative research productivity leads to a higher relative production technology, which in turn leads to a lower relative price and a higher relative domestic expenditure. Below I formalize this argument and propose a solution to address these overestimation concerns.…”

“…i , the R&D parameter ; and the dispersion parameter , the ex-post evaluation of (31) Notice that relative to the model with no innovation, the formula for c W it must be augmented by the …rst term in (31) to capture the endogenous adjustments in technology. 33 (29) for some value of the parameter ; and (iii) I compute the change in real income per capita according to (31). In this way, the di¤erences in the predicted changes in real income per capita between the model with no innovation and the model with directed research are those that emerge from setting = 0 or > 0 in the system in changes (29).…”

Unifying Macro Elasticities in International Economics

“…Within this framework, we show that there is no connection between the macro elasticities of the two literatures when expenditure shares are negligible in the calculation of 1 Since the trade elasticity used in new trade models, such as Eaton and Kortum (2002), corresponds to the elasticity of substitution across countries (including home country) minus one in international trade as shown in studies such as by Anderson and Van Wincoop (2004), the commonly used trade elasticity of about 4 suggested by Simonovska and Waugh (2014a) and used by new trade models corresponds to the elasticity of substitution across countries of about 5. price elasticities. The tables turn when such expenditure shares are taken into account in this paper, which results in having price elasticities of demand connected to elasticities of substitution through such expenditure shares.…”

“…Although elasticity measures di¤er across these studies, international …nance studies mostly follow Backus, Kehoe, and Kydland (1994) with a macro elasticity value of about 1.5, while international trade studies mostly follow Anderson and Van Wincoop (2004) or recently Simonovska and Waugh (2014a) and Simonovska and Waugh (2014b) with a macro elasticity value of about 5. 1 It is implied that if we directly employ these numbers in a policy analysis, say, in order to investigate the e¤ects of a foreign price change due to tari¤s or exchange rates, international trade studies imply quantity changes that are at least three times the international …nance studies.…”