The Intensive Margin in Trade

67 Pages Posted: 29 Oct 2018 Last revised: 30 Oct 2018

See all articles by Ana M. Fernandes

Ana M. Fernandes

World Bank - International Trade Division; World Bank

Peter J. Klenow

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

Sergii Meleshchuk

University of California, Berkeley

Martha Denisse Pierola

World Bank - Development Research Group (DECRG)

Andres Rodriguez-Clare

Inter-American Development Bank (IDB)

Multiple version iconThere are 4 versions of this paper

Date Written: October 26, 2018

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 and Klenow, Peter J. and Meleshchuk, Sergii and Pierola, Martha Denisse and Rodriguez-Clare, Andres, The Intensive Margin in Trade (October 26, 2018). World Bank Policy Research Working Paper No. 8625. Available at SSRN: https://ssrn.com/abstract=3273672

Ana Margarida Fernandes (Contact Author)

World Bank - International Trade Division

1818 H Street, N.W.
Washington, DC 20433
United States

World Bank ( email )

1818 H Street, N.W.
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United States

HOME PAGE: http://econ.worldbank.org/staff/afernandes

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

Sergii Meleshchuk

University of California, Berkeley

Martha Denisse Pierola

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street N.W.
MSN3-311
Washington, DC 20433
United States

Andres Rodriguez-Clare

Inter-American Development Bank (IDB)

1300 New York Avenue NW
Washington, DC 20577
United States

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