Working Paper: NBER ID: w24051
Authors: Stephen J. Redding; David E. Weinstein
Abstract: We develop a new framework for aggregating from micro to macro patterns of trade. We derive price indexes that determine comparative advantage across countries and sectors and the aggregate cost of living. If firms and products are imperfect substitutes, we show that these price indexes depend on variety, average demand/quality and the dispersion of demand/quality-adjusted prices, and are only weakly related to standard empirical measures of average prices, thereby providing insight for elasticity puzzles. Of the cross-section (time-series) variation in comparative advantage, 50 (90) percent is accounted for by variety and average demand/quality, with average prices contributing less than 10 percent.
Keywords: International Trade; Micro-Macro Aggregation; Elasticity of Substitution
JEL Codes: F10; F14; F60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand parameters (C69) | observed trade flows (F14) |
| variety (Y90) | price indexes (C43) |
| average demand-quality (L15) | price indexes (C43) |
| demand-quality adjusted prices (C43) | price indexes (C43) |
| firm entry/exit (L26) | changes in trade patterns (F12) |
| average demand (R22) | changes in trade patterns (F12) |
| price index (C43) | rationalization of observed trade flows (F12) |