Trade Models, Trade Elasticities, and the Gains from Trade
48 Pages Posted: 22 Sep 2014
Date Written: September 2014
We argue that the welfare gains from trade in new models with micro-level margins exceed those in frameworks without these margins. Theoretically, we show that for fixed trade elasticity, different models predict identical trade flows, but different patterns of micro-level price variation. Thus, given data on trade flows and micro-level prices, different models have different implied trade elasticities and welfare gains. Empirically, models with extensive or variable mark-up margins yield significantly larger welfare gains. The results are robust to incorporating into the estimation moment conditions that use trade-flow and tariff data, which imply a common trade elasticity across models.
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