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Variety Gains and the Extensive Margin of Trade

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  • Lukas Mohler

Abstract

Findings from the literature suggest that previous estimates of the variety gains from trade are too small because of the imprecise measurement of the imported variety set under the Armington assumption. In this contribution, the lambda ratios as presented in Feenstra (1994) are first modified by assuming that all import variations are due to extensive margin adjustments. Under this extreme assumption, variety gains increase by a factor of six compared with the baseline Armington product-country variety differentiation case. Second, results from the literature on multi-product firms are used to obtain a more realistic magnitude of the extensive margin of imports by accounting for the entry and exit of firms as well as for product turnover within firms. It is found that welfare gains still increase by a factor of 2.5 compared with the Armington baseline case.

Suggested Citation

  • Lukas Mohler, 2014. "Variety Gains and the Extensive Margin of Trade," International Economic Journal, Taylor & Francis Journals, vol. 28(4), pages 543-558, December.
  • Handle: RePEc:taf:intecj:v:28:y:2014:i:4:p:543-558
    DOI: 10.1080/10168737.2014.907629
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