Endogenous Variety and the Gains from Trade

14 Pages Posted: 29 Apr 2008 Last revised: 29 Jul 2010

See all articles by Costas Arkolakis

Costas Arkolakis

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Svetlana A. Demidova

Department of Economics, McMaster University

Peter J. Klenow

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2008

Abstract

We explore the implications of models with increasing returns, endogenous variety and firm-level heterogeneity for the quantification of the gains from trade. We first focus on the impact of trade liberalization on imported variety by analyzing the experience of Costa Rica from 1986 to 1992. We find that although liberalization triggered a sizable increase in variety, the resulting welfare gains were small because of strong heterogeneity across imported goods. Upon trade liberalization, the new varieties are imported in small quantities, and hence contribute little to welfare. We then present a model with firm-level increasing returns, differentiated goods, monopolistic competition, endogenous variety and free entry to show that total variety (domestic plus imported) can either increase, decrease or remain constant with trade liberalization. More importantly, the gains from trade do not depend on what happens to total variety. In fact, we find that, conditional on the estimated elasticities of trade with respect to trade costs, models with increasing returns, endogenous variety, free or restricted entry, and firm-level heterogeneity have exactly the same implications for welfare gains from trade liberalization as traditional models.

Suggested Citation

Arkolakis, Costas and Demidova, Svetlana A. and Klenow, Peter J. and Rodríguez-Clare, Andrés, Endogenous Variety and the Gains from Trade (April 2008). NBER Working Paper No. w13933. Available at SSRN: https://ssrn.com/abstract=1125628

Costas Arkolakis (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8264
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Svetlana A. Demidova

Department of Economics, McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Peter J. Klenow

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
26
Abstract Views
853
PlumX Metrics