The Intensive Margin in Trade

68 Pages Posted: 18 Mar 2019

See all articles by Ana M. Fernandes

Ana M. Fernandes

World Bank - International Trade Division; World Bank

Peter J. Klenow

Stanford University

Sergii Meleshchuk

International Monetary Fund (IMF)

Denisse Pierola

Inter-American Development Bank (IDB)

Andrés Rodríguez-Clare

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

Multiple version iconThere are 4 versions of this paper

Date Written: 2019

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. We subject this theoretical prediction to a reality check drawing upon the World Banks Exporter Dynamics Database (EDD) which has firm-level exports from 50 developing countries to all destinations. We find that around 50 percent of the variation in exports across trading partners is along the intensive margin, contradicting the benchmark Melitz-Pareto model. We find 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. We then study the implications of our findings for quantitative trade theory. Using likelihood methods and the EDD, we estimate a generalized Melitz model with a joint lognormal distribution for firm productivity, fixed costs and demand shifters, and use exact hat algebra to quantify the counterfactual effects of a decline in trade costs on trade flows and welfare in the estimated model. Finally, we compare these effects 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 our estimated Melitz-lognormal model. We find 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.

Keywords: intensive margin of trade, extensive margin of trade, productivity distribution, trade costs, welfare, Pareto

JEL Classification: F100, F120

Suggested Citation

Fernandes, Ana Margarida and Klenow, Peter J. and Meleshchuk, Sergii and Pierola, Denisse and Rodríguez-Clare, Andrés, The Intensive Margin in Trade (2019). CESifo Working Paper No. 7540, Available at SSRN: https://ssrn.com/abstract=3352904 or http://dx.doi.org/10.2139/ssrn.3352904

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.
Washington, DC 20433
United States

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

Peter J. Klenow

Stanford University ( email )

Stanford, CA 94305
United States

Sergii Meleshchuk

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Denisse Pierola

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
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

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