Estimating Trade Flows: Trading Partners and Trading Volumes

45 Pages Posted: 23 Feb 2007 Last revised: 11 Nov 2013

See all articles by Elhanan Helpman

Elhanan Helpman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Marc J. Melitz

Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Yona Rubinstein

Tel Aviv University - Eitan Berglas School of Economics

Date Written: February 2007

Abstract

We develop a simple model of international trade with heterogeneous firms that is consistent with a number of stylized features of the data. In particular, the model predicts positive as well as zero trade flows across pairs of countries, and it allows the number of exporting firms to vary across destination countries. As a result, the impact of trade frictions on trade flows can be decomposed into the intensive and extensive margins, where the former refers to the trade volume per exporter and the latter refers to the number of exporters. This model yields a generalized gravity equation that accounts for the self-selection of firms into export markets and their impact on trade volumes. We then develop a two-stage estimation procedure that uses a selection equation into trade partners in the first stage and a trade flow equation in the second. We implement this procedure parametrically, semi-parametrically, and non-parametrically, showing that in all three cases the estimated effects of trade frictions are similar. Importantly, our method provides estimates of the intensive and extensive margins of trade. We show that traditional estimates are biased, and that most of the bias is not due to selection but rather due to the omission of the extensive margin. Moreover, the effect of the number of exporting firms varies across country pairs according to their characteristics. This variation is large, and particularly so for trade between developed and less developed countries and between pairs of less developed countries.

Suggested Citation

Helpman, Elhanan and Melitz, Marc J. and Rubinstein, Yona, Estimating Trade Flows: Trading Partners and Trading Volumes (February 2007). NBER Working Paper No. w12927. Available at SSRN: https://ssrn.com/abstract=964890

Elhanan Helpman

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-4690 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Marc J. Melitz

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-8297 (Phone)
617-417-6536 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yona Rubinstein

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 5828 (Phone)
+972 3 640 9908 (Fax)

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