The Intensive Margin in Trade
Is the variation in bilateral trade flows across countries primarily due to differences in the number of exporting firms (the extensive margin) or in the average size of an exporter (the intensive margin)? And how does this affect the estimation an...
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| Format: | Working Paper |
| Language: | English |
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World Bank, Washington, DC
2018
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| Online Access: | http://documents.worldbank.org/curated/en/640381540579001233/The-Intensive-Margin-in-Trade http://hdl.handle.net/10986/30645 |
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okr-10986-306452021-06-08T14:42:48Z The Intensive Margin in Trade Fernandes, Ana M. Klenow, Peter J. Meleshchuk, Sergii Pierola, Martha Denisse Rodriguez-Clare, Andres MARGIN OF TRADE PRODUCTIVITY TRADE COSTS WELFARE ANALYSIS PARETO EXPORT COSTS QUANTITATIVE TRADE THEORY TRADE ELASTICITY Is the variation in bilateral trade flows across countries primarily due to differences in the number of exporting firms (the extensive margin) or in the average size of an exporter (the intensive margin)? And how does this affect the estimation and quantitative implications of the Melitz (2003) trade model? The benchmark Melitz model with Pareto-distributed firm productivity and fixed costs of exporting, predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners should occur on the extensive margin. This paper subjects this theoretical prediction to a reality check drawing upon the World Bank's Exporter Dynamics Database (EDD) which has firm-level exports from 50 developing countries to all destinations. Around 50 percent of the variation in exports across trading partners is shown to be along the intensive margin, contradicting the benchmark Melitz-Pareto model. The paper finds that moving from a Pareto to a lognormal distribution of firm productivity allows the Melitz model to successfully match the role of the intensive margin evident in the EDD. The paper then studies the implications of our findings for quantitative trade theory. Using likelihood methods and the EDD, a generalized Melitz model with a joint lognormal distribution for firm productivity, fixed costs and demand shifters is estimated, and exact hat algebra is used to quantify the counterfactual effects of a decline in trade costs on trade flows and welfare in the estimated model. Finally, these effects are compared to those that would be predicted by the Melitz-Pareto model, with the Pareto shape parameter chosen to match the average trade elasticity implied by the estimated Melitz-lognormal model. The paper shows that the effects on welfare turn out to be quite close to those in the standard Melitz-Pareto model even though the effects on trade flows remain different. 2018-11-01T17:32:03Z 2018-11-01T17:32:03Z 2018-10 Working Paper http://documents.worldbank.org/curated/en/640381540579001233/The-Intensive-Margin-in-Trade http://hdl.handle.net/10986/30645 English Policy Research Working Paper;No. 8625 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
MARGIN OF TRADE PRODUCTIVITY TRADE COSTS WELFARE ANALYSIS PARETO EXPORT COSTS QUANTITATIVE TRADE THEORY TRADE ELASTICITY |
| spellingShingle |
MARGIN OF TRADE PRODUCTIVITY TRADE COSTS WELFARE ANALYSIS PARETO EXPORT COSTS QUANTITATIVE TRADE THEORY TRADE ELASTICITY Fernandes, Ana M. Klenow, Peter J. Meleshchuk, Sergii Pierola, Martha Denisse Rodriguez-Clare, Andres The Intensive Margin in Trade |
| relation |
Policy Research Working Paper;No. 8625 |
| description |
Is the variation in bilateral trade
flows across countries primarily due to differences in the
number of exporting firms (the extensive margin) or in the
average size of an exporter (the intensive margin)? And how
does this affect the estimation and quantitative
implications of the Melitz (2003) trade model? The benchmark
Melitz model with Pareto-distributed firm productivity and
fixed costs of exporting, predicts that, conditional on the
fixed costs of exporting, all variation in exports across
trading partners should occur on the extensive margin. This
paper subjects this theoretical prediction to a reality
check drawing upon the World Bank's Exporter Dynamics
Database (EDD) which has firm-level exports from 50
developing countries to all destinations. Around 50 percent
of the variation in exports across trading partners is shown
to be along the intensive margin, contradicting the
benchmark Melitz-Pareto model. The paper finds that moving
from a Pareto to a lognormal distribution of firm
productivity allows the Melitz model to successfully match
the role of the intensive margin evident in the EDD. The
paper then studies the implications of our findings for
quantitative trade theory. Using likelihood methods and the
EDD, a generalized Melitz model with a joint lognormal
distribution for firm productivity, fixed costs and demand
shifters is estimated, and exact hat algebra is used to
quantify the counterfactual effects of a decline in trade
costs on trade flows and welfare in the estimated model.
Finally, these effects are compared to those that would be
predicted by the Melitz-Pareto model, with the Pareto shape
parameter chosen to match the average trade elasticity
implied by the estimated Melitz-lognormal model. The paper
shows that the effects on welfare turn out to be quite close
to those in the standard Melitz-Pareto model even though the
effects on trade flows remain different. |
| format |
Working Paper |
| author |
Fernandes, Ana M. Klenow, Peter J. Meleshchuk, Sergii Pierola, Martha Denisse Rodriguez-Clare, Andres |
| author_facet |
Fernandes, Ana M. Klenow, Peter J. Meleshchuk, Sergii Pierola, Martha Denisse Rodriguez-Clare, Andres |
| author_sort |
Fernandes, Ana M. |
| title |
The Intensive Margin in Trade |
| title_short |
The Intensive Margin in Trade |
| title_full |
The Intensive Margin in Trade |
| title_fullStr |
The Intensive Margin in Trade |
| title_full_unstemmed |
The Intensive Margin in Trade |
| title_sort |
intensive margin in trade |
| publisher |
World Bank, Washington, DC |
| publishDate |
2018 |
| url |
http://documents.worldbank.org/curated/en/640381540579001233/The-Intensive-Margin-in-Trade http://hdl.handle.net/10986/30645 |
| _version_ |
1764472519587266560 |