Working Paper: CEPR ID: DP10255
Authors: Kristian Behrens; Yoshitsugu Kanemoto; Yasusada Murata
Abstract: We generalize the formulae for welfare changes by Arkolakis, Costinot, and RodrÃguez-Clare (2012) and Melitz and Redding (2014a) to allow for various cardinalizations of the subutility functions for varieties. Despite the same macro restrictions and the same equilibrium allocations, our new formula coincides with the original ones if and only if the number of varieties is invariant to foreign shocks. When product diversity responds to foreign shocks, different cardinalizations generate different welfare changes, thus revealing a fundamental difficulty in quantifying welfare gains implied by new trade models.
Keywords: cardinalization; new trade models; product diversity; subutility function; welfare gains from trade
JEL Codes: F11; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign shocks (F69) | number of varieties consumed (L66) |
| number of varieties consumed (L66) | welfare changes (I38) |
| foreign shocks (F69) | welfare changes (I38) |
| cardinalization of subutility functions (D11) | welfare changes (I38) |
| foreign shocks (F69) | product diversity (L15) |