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Globalization and the Gains from Variety

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  • Christian Broda
  • David E. Weinstein

Abstract

Since the seminal work of Krugman (1979), product variety has played a central role in models of trade and growth. In spite of the general use of love-of-variety models, there has been no systematic study of how the import of new varieties has contributed to national welfare gains in the United States. In this paper we show that the unmeasured growth in product variety from US imports has been an important source of gains from trade over the last three decades (1972-2001). Using extremely disaggregated data, we show that the number of imported product varieties has increased by a factor of four. We also estimate the elasticities of substitution for each available category at the same level of aggregation, and describe their behavior across time and SITC-5 industries. Using these estimates we develop an exact price index and find that the upward bias in the conventional import price index is approximately 1.2 percent per year. The magnitude of this bias suggests that the welfare gains from variety growth in imports alone are 2.8 percent of GDP.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10314.

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Date of creation: Feb 2004
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Publication status: published as Broda, Christian and David E. Weinstein. "Globalization And The Gains From Variety," Quarterly Journal of Economics, 2006, v121(2,May), 541-585.
Handle: RePEc:nbr:nberwo:10314

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  1. How big are the gains from trade?
    by jdingel in Trade diversion on 2010-09-21 03:44:34
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