The Intensive Margin in Trade: How Big and How Important?

In benchmark trade models that feature a constant trade elasticity, bilateral exports vary entirely on the intensive margin (exports per firm) or entirely on the extensive margin (number of firms). Our empirical analysis documents that roughly one-half of this variation occurs along each margin, implying that the trade elasticity is not constant. We estimate a generalized Melitz model with a joint log-normal distribution for firm productivity, fixed costs, and demand shifters. Using exact-hat algebra, we quantify how trade costs affect trade flows and welfare. Welfare effects are similar to those in the Melitz-Pareto model, but implied trade flows differ significantly.