Working Paper: NBER ID: w20495
Authors: Ina Simonovska; Michael E. Waugh
Abstract: We argue that the welfare gains from trade in new models with micro-level margins exceed those in frameworks without these margins. Theoretically, we show that for fixed trade elasticity, different models predict identical trade flows, but different patterns of micro-level price variation. Thus, given data on trade flows and micro-level prices, different models have different implied trade elasticities and welfare gains. Empirically, models with extensive or variable mark-up margins yield significantly larger welfare gains. The results are robust to incorporating into the estimation moment conditions that use trade-flow and tariff data, which imply a common trade elasticity across models.
Keywords: No keywords provided
JEL Codes: F10; F11; F14; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| welfare gains from trade in new models with microlevel margins (F11) | larger than those in models without such margins (C24) |
| different models predict identical trade flows for fixed trade elasticities (F11) | imply different patterns of microlevel price variation (D43) |
| Armington model results in a higher required trade elasticity (F12) | to match observed price gaps (D41) |
| EK model's trade elasticity estimate (F11) | about 20% lower than that of the Armington model (F11) |
| BEJK model's estimate (C51) | about 33% lower than EK (F29) |
| welfare gains (D69) | estimated to be 50% larger in the BEJK model (C51) |
| estimation of trade elasticities (F14) | dependent on the underlying model assumptions (C51) |
| different models produce systematically different estimates of trade elasticities and welfare gains (F11) | establish a causal link between model structure, trade elasticities, and welfare gains from trade (F11) |
| Armington model overpredicts welfare costs (F11) | EK model closely matches observed data (E17) |