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The Intensive Margin in Trade

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  • Fernandes,Ana Margarida
  • Klenow,Peter J.
  • Meleshchuk,Sergii
  • Pierola,Martha Denisse
  • Rodriguez-Clare,Andres

Abstract

Is the variation in bilateral trade flows across countries primarily due to differences in the number of exporting firms (the extensive margin) or in the average size of an exporter (the intensive margin)? And how does this affect the estimation and quantitative implications of the Melitz (2003) trade model? The benchmark Melitz model with Pareto-distributed firm productivity and fixed costs of exporting, predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners should occur on the extensive margin. This paper subjects this theoretical prediction to a reality check drawing upon the World Bank's Exporter Dynamics Database (EDD) which has firm-level exports from 50 developing countries to all destinations. Around 50 percent of the variation in exports across trading partners is shown to be along the intensive margin, contradicting the benchmark Melitz-Pareto model. The paper finds that moving from a Pareto to a lognormal distribution of firm productivity allows the Melitz model to successfully match the role of the intensive margin evident in the EDD. The paper then studies the implications of our findings for quantitative trade theory. Using likelihood methods and the EDD, a generalized Melitz model with a joint lognormal distribution for firm productivity, fixed costs and demand shifters is estimated, and exact hat algebra is used to quantify the counterfactual effects of a decline in trade costs on trade flows and welfare in the estimated model. Finally, these effects are compared to those that would be predicted by the Melitz-Pareto model, with the Pareto shape parameter chosen to match the average trade elasticity implied by the estimated Melitz-lognormal model. The paper shows that the effects on welfare turn out to be quite close to those in the standard Melitz-Pareto model even though the effects on trade flows remain different.

Suggested Citation

  • Fernandes,Ana Margarida & Klenow,Peter J. & Meleshchuk,Sergii & Pierola,Martha Denisse & Rodriguez-Clare,Andres, 2018. "The Intensive Margin in Trade," Policy Research Working Paper Series 8625, The World Bank.
  • Handle: RePEc:wbk:wbrwps:8625
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    2. Ezra Oberfield & Esteban Rossi-Hansberg & Nicholas Trachter & Pierre-Daniel Sarte, 2019. "Plants in Space," 2019 Meeting Papers 1507, Society for Economic Dynamics.
      • Ezra Oberfield & Esteban Rossi-Hansberg & Pierre-Daniel G. Sarte & Nicholas Trachter, 2020. "Plants in Space," Working Paper 20-05, Federal Reserve Bank of Richmond.
      • Ezra Oberfield & Esteban Rossi-Hansberg & Pierre-Daniel Sarte & Nicholas Trachter, 2020. "Plants in Space," NBER Working Papers 27303, National Bureau of Economic Research, Inc.
      • Oberfield, Ezra & Rossi-Hansberg, Esteban & Sarte, Pierre-Daniel & Trachter, Nicholas, 2020. "Plants in Space," CEPR Discussion Papers 14823, C.E.P.R. Discussion Papers.
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    5. Alessandra Bonfiglioli & Rosario Crinò & Gino Gancia, 2021. "International Trade with Heterogeneous Firms: Theory and Evidence," CESifo Working Paper Series 9423, CESifo.
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    7. Kokovin, Sergey & Molchanov, Pavel & Bykadorov, Igor, 2022. "Increasing returns, monopolistic competition, and international trade: Revisiting gains from trade," Journal of International Economics, Elsevier, vol. 137(C).
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    9. Michael B. Devereux & Wei Dong & Ben Tomlin, 2019. "Trade Flows and Exchange Rates: Importers, Exporters and Products," NBER Working Papers 26314, National Bureau of Economic Research, Inc.
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    12. Pedro Bento, 2020. "Competition, Innovation, and the Number of Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 275-298, July.
    13. Pedro Bento, 2021. "Trade without “scale effects”," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1252-1274, November.
    14. Sung Ju Cho & Saera Oh & Sang Hyeon Lee, 2020. "The Impact of Structure Similarity of Nontariff Measures on Agricultural Trade," Sustainability, MDPI, vol. 12(24), pages 1-13, December.
    15. Rod Falvey & Neil Foster-McGregor, 2022. "The breadth of preferential trade agreements and the margins of exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 158(1), pages 181-251, February.
    16. Antonio Navas & Antonella Nocco, 2021. "Trade liberalization, selection, and technology adoption with vertical linkages," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 979-1012, September.
    17. Lourenço S. Paz & Kul Prasad Kapri, 2019. "The Effects of the Chinese Imports on Brazilian Manufacturing Workers," Economies, MDPI, vol. 7(3), pages 1-22, August.
    18. Zurita, Carlos A., 2022. "Is The Gravity Model a Power Law?: Evidence from Colombia," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322368, Agricultural and Applied Economics Association.
    19. Luca Macedoni & Ariel Weinberger, 2021. "Quality Misallocation, Trade, and Regulations," CESifo Working Paper Series 9041, CESifo.
    20. Coughlin, Cletus C. & Bandyopadhyay, Subhayu, 2020. "Truncated productivity distributions and the intensive trade margin," Economics Letters, Elsevier, vol. 196(C).
    21. Defever, Fabrice & Riaño, Alejandro, 2022. "Firm-destination heterogeneity and the distribution of export intensity," Economics Letters, Elsevier, vol. 219(C).
    22. Ho, Wai-Ming, 2021. "International outsourcing, exchange rates, and monetary policy☆," Journal of International Money and Finance, Elsevier, vol. 118(C).
    23. Monika Mrázová & J. Peter Neary & Mathieu Parenti, 2021. "Sales and Markup Dispersion: Theory and Empirics," Econometrica, Econometric Society, vol. 89(4), pages 1753-1788, July.
    24. Dewitte, Ruben, 2020. "From Heavy-Tailed Micro to Macro: on the characterization of firm-level heterogeneity and its aggregation properties," MPRA Paper 103170, University Library of Munich, Germany.

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    JEL classification:

    • F00 - International Economics - - General - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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