From Micro to Macro: Demand, Supply, and Heterogeneity in the Trade Elasticity

49 Pages Posted: 3 Jul 2015

See all articles by Maria Bas

Maria Bas

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Thierry Mayer

Sciences Po

Mathias Thoenig

University of Lausanne; Centre for Economic Policy Research (CEPR)

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Date Written: July 2015

Abstract

Models of heterogeneous firms with selection into export market participation generically exhibit aggregate trade elasticities that vary across country-pairs. Only when heterogeneity is assumed Pareto-distributed do all elasticities collapse into a unique elasticity, estimable with a gravity equation. This paper provides a theory-based method for quantifying country-pair specific elasticities when moving away from Pareto, i.e. when gravity does not hold. Combining two firm-level customs datasets for which we observe French and Chinese individual sales on the same destination market over the 2000-2006 period, we are able to estimate all the components of the dyadic elasticity: i) the demand-side parameter that governs the intensive margin and ii) the supply side parameters that drive the extensive margin. These components are then assembled under theoretical guidance to calculate bilateral aggregate elasticities over the whole set of destinations, and their decomposition into different margins. Our predictions fit well with econometric estimates, supporting our view that micro-data is a key element in the quantification of non-constant macro trade elasticities.

Keywords: trade elasticity, firm-level data, heterogeneity, gravity, Pareto, log-normal.

JEL Classification: F1

Suggested Citation

Bas, Maria and Mayer, Thierry and Thoenig, Mathias, From Micro to Macro: Demand, Supply, and Heterogeneity in the Trade Elasticity (July 2015). Banque de France Working Paper No. 560, Available at SSRN: https://ssrn.com/abstract=2625937 or http://dx.doi.org/10.2139/ssrn.2625937

Maria Bas (Contact Author)

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

Thierry Mayer

Sciences Po ( email )

Mathias Thoenig

University of Lausanne ( email )

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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