Working Paper: NBER ID: w26124
Authors: Jonathan Eaton; Ana Cecilia Fieler
Abstract: We introduce quality differentiation and an extensive margin of products into a standard quantitative, general equilibrium model of international trade. Both the quality and the quantity of a product play a role in its contribution both to consumption and to production. The framework allows bilateral trade to vary at the extensive and intensive margins and the intensive margin of trade to vary at the quantity and unit-value margins. We estimate the parameters of the model using bilateral data on trade flows and on unit values in trade. The model captures (i) the well-documented increasing relation between unit values and both importer and exporter per capita income and (ii) how the extensive margin rises with importer and exporter size. But, unlike other contributions to the literature confronting these margins in international trade, our framework delivers a standard gravity formulation for trade flows and standard measures of the gains from trade apply.
Keywords: Quality Differentiation; International Trade; Bilateral Trade Flows; Trade Margins
JEL Codes: F11; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher wage (J31) | Higher quality (vertical and horizontal dimensions) (L15) |
| Higher wage (J31) | Greater quantity and quality of purchases (L15) |
| Wage of buyer (J31) | Vertical quality (L42) |
| Wage of seller (J31) | Horizontal quality (L41) |
| Size of importer (F10) | Extensive margin of trade (F10) |
| Size of exporter (F10) | Extensive margin of trade (F10) |