Working Paper: NBER ID: w22069
Authors: Changtai Hsieh; Nicholas Li; Ralph Ossa; Mujeung Yang
Abstract: We propose a new sufficient statistic to measure the gains from trade in models where the extensive margin trade elasticity is not necessarily constant. This statistic is a function of one data moment, the market share of continuing domestic products, and one parameter, the elasticity of substitution between products. It measures the gains from trade in a Ricardian model with any productivity distribution or a Melitz model with any productivity distribution and any pattern of selection into production and exporting. We apply our statistic to measure Canada's gains from the Canada-US Free Trade Agreement and find that they are smaller than suggested by statistics that assume a constant extensive margin response of trade.
Keywords: gains from trade; CUSFTA; elasticity of substitution; extensive margin
JEL Codes: F10; F12; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CUSFTA (F15) | Canada's real income (N12) |
| reductions in trade costs stemming from CUSFTA (F15) | gains measured in earlier analysis (C29) |
| generalized Melitz model (F12) | isolate causal effect of CUSFTA on Canada’s welfare gains (O51) |
| sufficient statistic (C20) | captures net effect of trade liberalization on domestic market shares (F14) |
| exit of many large Canadian firms post-1988 (N22) | smaller estimated gains from trade (F11) |