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Love of variety and gains from trade

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  • Gouel, Christophe
  • Jean, Sébastien

Abstract

We show analytically and quantitatively how gains from trade depend on love of variety, defined as the extent to which an additional product variety generates benefits in either final or intermediate consumption. To do this, we use a multi-country, multi-sector heterogeneous-firm gravity trade model where love of variety is parameterized separately from product substitutability using a generalized CES demand function. Counterfactual simulations based on a calibrated version of this model show that the gains from trade commonly vary by a proportion of one to three depending on the value of the love-of-variety elasticity. Trade war simulations also point to the strong sensitivity of the assessed impacts. We conclude that love of variety may be an important determinant of the gains from trade, an aspect that has so far been overlooked for the sake of convenience in the modeling framework and due to lack of empirical estimates.

Suggested Citation

  • Gouel, Christophe & Jean, Sébastien, 2023. "Love of variety and gains from trade," European Economic Review, Elsevier, vol. 158(C).
  • Handle: RePEc:eee:eecrev:v:158:y:2023:i:c:s0014292123001861
    DOI: 10.1016/j.euroecorev.2023.104558
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    More about this item

    Keywords

    International trade; Firm heterogeneity; Gains from trade; Gravity; Love of variety;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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