Globalization and the Gains from Variety

Working Paper: NBER ID: w10314

Authors: Christian Broda; David E. Weinstein

Abstract: Since the seminal work of Krugman (1979), product variety has played a central role in models of trade and growth. In spite of the general use of love-of-variety models, there has been no systematic study of how the import of new varieties has contributed to national welfare gains in the United States. In this paper we show that the unmeasured growth in product variety from US imports has been an important source of gains from trade over the last three decades (1972-2001). Using extremely disaggregated data, we show that the number of imported product varieties has increased by a factor of four. We also estimate the elasticities of substitution for each available category at the same level of aggregation, and describe their behavior across time and SITC-5 industries. Using these estimates we develop an exact price index and find that the upward bias in the conventional import price index is approximately 1.2 percent per year. The magnitude of this bias suggests that the welfare gains from variety growth in imports alone are 2.8 percent of GDP.

Keywords: Globalization; Variety; Welfare Gains; Trade

JEL Codes: F1; E3

Causal Claims

Cause	Effect
increased variety in imports (F10)	welfare gains for the United States (D69)
increased variety in imports (F10)	lower prices (P22)
lower prices (P22)	welfare gains for the United States (D69)
increased variety in imports (F10)	greater choice (D87)
greater choice (D87)	welfare gains for the United States (D69)
unmeasured growth in product variety (O49)	gains from trade (F11)
upward bias in conventional import price index (F14)	underestimation of welfare gains (D69)
accurately measured welfare gains from variety growth in imports (D69)	account for roughly 28% of GDP (E20)
elasticities of substitution (D11)	impact of variety growth on welfare (D69)