Imports, Product Variety and the Extensive Margin: Some Stylized Facts

Product variety has played a central role in models of trade and growth. Classical trade theory postulates that the elimination of trade barriers improves welfare by reducing the wedge between domestic and import prices as well as the ensuing deadweight loss. An entirely different reason for the gains from trade arises from models of monopolistic competition. The new trade theory, by integrating increasing returns to scale and monpolistic competition in a general equilibrium framework, brought the study of varieties into sharp focus by presenting a simple model in which countries gain from trade through the import of new varieties. If consumers value variety and countries cannot produce all varieties due to fixed cost in the production of each variety, consumers stand to gain from trade because it expands the set of available varieties. See the seminal work by Krugman [1979, 1980, 1981, 1983] Although the love-of-variety approach, introduced by Dixit & Stiglitz [1977], is a standard feature of most theoretical as well as applied models in trade and macro, we know very little about the magnitude of the gains from variety at the aggregate level. So far, empirical applications have been lagging behind the theoretical developments, but recently a number of empirical studies have been undertaken in order to empirically estimate the impact of varieties. One application is to compute an import price index, taking new varieties into account, which enables us to calculate the direct welfare gains from an improved access to more varieties. Recent studies seem to indicate that these effects can be quite large, see e.g.Broda & Weinstein [2006]. Futhermore, measures of product variety of inputs are directly related to endogenous growth models, which often assume that a larger set of intermediate inputs increases productivity and growth. The idea that countries can gain from international trade by getting ascces to a larger set of new products or new varieties of already existing products is reflected in many trade and growth models, see e.g.Rivera-Batiz [1991]. Empirical support for this hypothesis has been provided by Goldberg etal. [2009] and Amiti & Konings [2007]. Recent research in international trade emphasizes the importance of firms' extensive margins for understanding overall patterns of trade as well as how firms respond to trade liberalization. A key insight of this literature is that the extensive margins of trade can account for a large share of the variation in imports and exports across countries, see Bernard et.al. [2010]. The distinctive feature of this paper consists in calculating direct measures of product variety for the EU-27 and the OECD countries from 1984 to 2000. Furthermore, we provide aggregate as well as disaggregated, at a secoral level, measures of product variety. The objective is to provide a set of stylized facts regarding the importance of the extensive margin and explicit measures of product variety for imports.using a broad cross section of advanced (and developing) countries and disaggregating across sectors. This description is of value in itself, but would also serve the purpose as background foe further, more analytical studies of the role of the extensive margin for welfare and productivity. Amiti, Mary and Jozef Konings [2007], "Trade Liberalization, Intermediate Inputs, and Productivity", American Economic Review, 97(5), 1611-1638. Bernard, Andrew B., J. Bradford Jensen, Stephan J. Redding, and Peter K. Schott [2009b] "The Margins of U.S. Trade ", American Economic Review, Papers and Proceedings 99:2, 487-493. Broda, Christian and David E. Weinstein [2006], "Globalization and the Gains from Trade", Quarterly Journal of Economics, May, 121(2), 541-585. Dixit & Stiglitz [1977], "Monopolistic Competition and Optimum Product Diversity", American Economic Review, Vol. 67 No. 3, June 1977, 297-308. Feenstra, Robert C. [1994], "New Product Varieties and the Measurement of International Prices", American Economic Review, 84(1), March, 157-177. Feenstra, Robert C., Robert E. Lipsey, Haiyan Deng, Alyson C. Ma, and Hengyong Mo [2005], "World Trade Flows: 1962 - 2000", Working Paper 11040, National Bureau of Economic Research. Funke, Michael and Ralf Ruhwedel [2002], "Export Variety and Export Performance: Empirical Evidence for the OECD Countries", Weltwirtschaftliches Archiv, Vol.138 (1), 97-114. Funke, Michael and Ralf Ruhwedel [2005], "Export variety and economic growth in East Euopean transition economies", Economics of Transition, Volume 13 (1), 25-50. Goldberg, Pinelopi, Amit Khandelwal, Nina Pavenik, and Petia Topalova [2009], "Trade Liberalization and New Imported Inputs", American Economic Review, Papers and Proceedings 99:2, 494-500. Krugman, Paul [1979], "Increasing Returns, Monopolistic Competition, And International Trade", Journal of International Economics, Vol.9, 469-479. Krugman, Paul [1980], "Scale Economies. Product Differentiation, and the Pattern of Trade", American Economic Review, Vol.70, No.5, 950-959. Krugman, Paul [1981], "Intraindustry Specialization and the Gains from Trade", Journal of Political Economy, Vol.89, No.5, 959-973. Krugman, Paul [1983], "New Theories of Trade Among Industrial Countries", American Economic Review, Papers and Proceedings, Vol. 73, No. 2, 343-347. Rivera-Batiz, and P. Romer [1991], "Economic Integration and Endogenous Growth", Quarterly Journal of Economics, 106(2), 531-555. Romer, Paul [1990], "Endogenous Technical Change", Journal of Political Economy, 98, No.5, s71-S102. Romer, Paul [1994], "New goods, old theory, and the welfare costs of trade restrictions", Journal of Development Economics 43 5-38. In the empirical work we will follow rather closely the general approach adopted by Bernard et.al. [2009] and Goldberg etal. [2009] in order to identify the extensive margin in imports. For our computation of product variety we adopt the methodology develped by Feenstra [1994]. xpected results The study would generate two sets of results. First, we would investigate the quantitative importance of the extensive margin for all our countries, i.e. we compute the contribution of new goods to the total change in imports between 1984 and 2000. Second, we would compute simple count measures of product variety as well as the measure proposed by Feenstra (1994), which takes into account the relative share of different goods. We compute these measures for both aggregate imports and for imports on a sector level.