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Do Falling Iceberg Costs Account for US Export Growth?

  • George Alessandria

    (Federal Reserve Bank of Philadelphia)

We study the growth in the share of US manufactured output exported from 1987 to 2002 through the lens of the Melitz (2003) model, a monopolistically competitive model with heterogenous producers and fixed costs of exporting. Using the model, we infer that iceberg costs fell from approximately 54 percent in 1987 to nearly 41 percent in 2002. We then take a version of the model calibrated to match the employment size distribution and characteristic of exporters in 1987 and use it to measure the export growth due to the decline in iceberg costs. Contrary to common convention, we find that exports should have actually grown 75 percent more than they did. The models overpredicts export growth in large part because it misses the shift in manufacturing to relatively small establishments that did not invest in becoming exporters. In contrast to the theory, in this period, employment was largely reallocated away from very large establishments, those with more than 2500 employees, towards very small manufacturing establishments, those with less than 100 employees. We also find that trade integration from falling trade costs played a very small role in the contraction of manufacturing employment over this period.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 510.

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Date of creation: 2009
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Handle: RePEc:red:sed009:510
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Baldwin, Richard & Robert-Nicoud, Frédéric, 2006. "Trade and Growth with Heterogenous Firms," CEPR Discussion Papers 5563, C.E.P.R. Discussion Papers.
  2. Christian Broda & David E. Weinstein, 2004. "Globalization and the Gains from Variety," NBER Working Papers 10314, National Bureau of Economic Research, Inc.
  3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  4. Andrew B. Bernard & J. Bradford Jensen, 2004. "Entry, Expansion, and Intensity in the US Export Boom, 1987-1992," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 662-675, 09.
  5. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, 05.
  6. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
  7. Bernard, A., 1997. "Exceptional Exporter Performance: Cause, Effect, or Both?," Working papers 97-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Kei-Mu Yi, 2000. "Can vertical specialization explain the growth of world trade?," Staff Reports 96, Federal Reserve Bank of New York.
  9. Jonathan David Ostry & Carmen Reinhart, 1991. "Private Saving and Terms of Trade Shocks; Evidence From Developing Countries," IMF Working Papers 91/100, International Monetary Fund.
  10. Avinash Dixit, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 205-228.
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