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New Trade Models, New Welfare Implications

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  • Marc Melitz
  • Stephen Redding

Abstract

We show that endogenous firm selection provides a new welfare margin for heterogeneous firm�models of trade (relative to homogeneous firm models). Under some parameter restrictions, the�trade elasticity is constant and is a sufficient statistic for welfare, along with the domestic trade�share. However, even small deviations from these restrictions imply that trade elasticities are�variable and differ across markets and levels of trade costs. In this more general setting, the�domestic trade share and endogenous trade elasticity are no longer sufficient statistics for welfare.�Additional empirically observable moments of the micro structure also matter for welfare.KEYWORDS: firm heterogeneity, welfare gains from trade, trade policy evaluationJ.E.L. CLASSIFICATION: F12, F15

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Paper provided by Harvard University OpenScholar in its series Working Paper with number 65406.

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Handle: RePEc:qsh:wpaper:65406

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  1. Andrew B Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and productivity in international trade," Working Papers, Center for Economic Studies, U.S. Census Bureau 00-08, Center for Economic Studies, U.S. Census Bureau.
  2. Dennis Novy, 2010. "International Trade without CES: Estimating Translog Gravity," CESifo Working Paper Series 3008, CESifo Group Munich.
  3. Bernard, Andrew & Jensen, J Bradford & Redding, Stephen J & Schott, Peter, 2007. "Firms in International Trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6277, C.E.P.R. Discussion Papers.
  4. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, American Economic Association, vol. 102(1), pages 94-130, February.
  5. Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 118(3), pages 433-484, 06.
  6. Robert C. Feenstra, 2009. "Measuring the Gains from Trade under Monopolistic Competition," NBER Working Papers 15593, National Bureau of Economic Research, Inc.
  7. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, Econometric Society, vol. 70(5), pages 1741-1779, September.
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Cited by:
  1. Holger Breinlich & Gianmarco I. P. Ottaviano & Jonathan R. W. Temple, 2013. "Regional Growth and Regional Decline," CEP Discussion Papers, Centre for Economic Performance, LSE dp1232, Centre for Economic Performance, LSE.
  2. Helpman, Elhanan, 2013. "Foreign Trade and Investment: Firm-Level Perspectives," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9482, C.E.P.R. Discussion Papers.
  3. Amit Khandelwal & Pablo Fajgelbaum, 2013. "Measuring the Unequal Gains From Trade," 2013 Meeting Papers, Society for Economic Dynamics 456, Society for Economic Dynamics.
  4. Robert C. Feenstra, 2014. "Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity," NBER Working Papers 19833, National Bureau of Economic Research, Inc.
  5. Nocco, Antonella & Ottaviano, Gianmarco & Salto, Matteo, 2013. "Monopolistic Competition and Optimum Product Selection: Why and how heterogeneity matters," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9417, C.E.P.R. Discussion Papers.
  6. Oyamada, Kazuhiko, 2014. "Neutrality in the choice of number of firms or level of fixed costs in calibrating an Armington-Krugman-Melitz encompassing module for applied general equilibrium models," IDE Discussion Papers, Institute of Developing Economies, Japan External Trade Organization(JETRO) 465, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  7. Bolatto, Stefano & Sbracia, Massimo, 2014. "Deconstructing the Gains from Trade: Selection of Industries vs. Reallocation of Workers," MPRA Paper 56638, University Library of Munich, Germany.

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