The Intensive Margin in Trade

67 Pages Posted: 14 Jan 2019

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

Denisse Pierola

Inter-American Development Bank (IDB)

Andres Rodriguez-Clare

Inter-American Development Bank (IDB)

Multiple version iconThere are 4 versions of this paper

Date Written: December 2018

Abstract

The Melitz model highlights the importance of the extensive margin (the number of firms exporting) for trade flows. Using the World Bank's Exporter Dynamics Database (EDD) featuring firm-level exports from 50 countries, we find that around 50 percent of variation in exports is along the extensive margin-a quantitative victory for the Melitz framework. The remaining 50 percent on the intensive margin (exports per exporting firm) contradicts a special case of Melitz with Pareto-distributed firm productivity, which has become a tractable benchmark. This benchmark model predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners should occur on the extensive margin. We find that moving from a Pareto to a lognormal distribution allows the Melitz model to match the role of the intensive margin in the EDD. We use likelihood methods and the EDD to estimate a generalized Melitz model with a joint lognormal distribution for firm-level productivity, fixed costs and demand shifters, and use 'exact hat algebra' to quantify the effects of a decline in trade costs on trade flows and welfare in the estimated model. The welfare effects turn out to be quite close to those in the standard Melitz-Pareto model when we choose the Pareto shape parameter to fit the average trade elasticity implied by our estimated Melitz-lognormal model, although there are significant differences regarding the effects on trade flows.

Keywords: Welfare, Intensive margin of trade, extensive margin of trade, productivity distribution, trade costs, Pareto, General, Models of Trade with Imperfect Competition and Scale Economies

JEL Classification: F10, F12

Suggested Citation

Fernandes, Ana Margarida and Klenow, Peter J. and Meleshchuk, Sergii and Pierola, Denisse and Rodriguez-Clare, Andres, The Intensive Margin in Trade (December 2018). IMF Working Paper No. 18/259. Available at SSRN: https://ssrn.com/abstract=3314592

Ana Margarida Fernandes (Contact Author)

World Bank - International Trade Division

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United States

World Bank ( email )

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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)

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Cambridge, MA 02138
United States

Sergii Meleshchuk

University of California, Berkeley

Denisse Pierola

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Andres Rodriguez-Clare

Inter-American Development Bank (IDB)

1300 New York Avenue NW
Washington, DC 20577
United States

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