International Trade and Investment

December 6-7, 2013
Robert Feenstra of University of California, Davis, Organizer

Marc Melitz, Harvard University and NBER, and Stephen Redding, Princeton University and NBER

Firm Heterogeneity and Aggregate Welfare (NBER Working Paper 18919)

Melitz and Redding examine how firm heterogeneity influences aggregate welfare through endogenous firm selection. They consider a homogeneous firm model that is a special case of a heterogeneous firm model with a degenerate productivity distribution. Keeping all structural parameters besides the productivity distribution the same, the authors show that the two models have different aggregate welfare implications, with larger welfare gains from reductions in trade costs in the heterogeneous firm model. Calibrating parameters to key U.S. aggregate and firm statistics, the authors find these differences in aggregate welfare to be quantitatively important (up to a few percentage points of GDP). Under the assumption of a Pareto productivity distribution, the two models can be calibrated to the same observed trade share, trade elasticity with respect to variable trade costs, and hence welfare gains from trade, as shown by Arkolakis, Costinot and Rodriguez-Clare (2012), but this requires assuming different elasticities of substitution between varieties and different fixed and variable trade costs across the two models.

Robert Feenstra

Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity

The monopolistic competition model in international trade offers three sources of gains from trade that do not arise in competitive models: expansion in product variety, a pro-competitive reduction in the markups charged by firms, and the self-selection of more efficient firms into exporting. Recent literature on trade with heterogeneous firms has emphasized the third of these effects, and the first two effects are ruled out when using a Pareto distribution for productivity with a support that is unbounded above. In this paper, Feenstra aims to restore a role for product variety and pro-competitive gains from trade by using a bounded Pareto distribution for productivity.

George Alessandria, Federal Reserve Bank of Philadelphia; Horag Choi, Monash University; and Kim Ruhl, New York University

Trade Adjustment Dynamics and the Welfare Gains from Trade

Alessandria, Choi, and Ruhl build a micro-founded two country dynamic general equilibrium model in which trade responds more to a cut in tariffs in the long run than in the short run. The dynamics of aggregate trade adjustment arise from the decisions individual producers make to expand their export sales gradually by making export-specific investments. The model is calibrated to match salient features of new exporter growth. The sluggishness in export expansion at the producer level leads to sluggishness in the aggregate response of exports to a change in tariffs, with a long-run trade elasticity that is 3.1 times the short-run trade elasticity. The authors estimate the welfare gains from trade from a cut in tariffs taking into account the transition period. While the intensity of trade expands slowly, consumption overshoots its new steady-state level, so the welfare gains are over three times larger than the long-run change in consumption. A cut in tariffs that increases the long-run share of production exported from 8.8 to 24.1 percent increases welfare by 6.4 percentage points. Models without this dynamic export decision underestimate the gains to removing trade barriers, particularly when constrained to match also the gradual expansion of aggregate trade flows.

Gordon Hanson and Marc-Andreas Muendler, University of California at San Diego and NBER, and Nels Lind, University of California at San Diego

The Dynamics of Comparative Advantage

Hanson, Lind, and Muendler explore the long-run evolution of comparative advantage and employ the gravity model of trade to extract a measure of export capability, purified of geographic and demand-side confounds, for 135 industries in 90 countries from 1962 to 2007. They use the resulting measure of a country-industry's export capability by year to document two striking empirical regularities in comparative advantage. One is hyperspecialization in exporting; in the typical country, export success is highly concentrated in a handful of industries. Hyperspecialization is consistent with a heavy upper tail in the distribution of export capabilities across industries within a country, which the authors find is well approximated by a generalized gamma distribution whose shape remains relatively stable over time. The second empirical regularity is a high rate of turnover in a country's top export industries. The evanescence of top exports reflects a high rate of decay in a typical country's export capability, which the authors estimate to be on the order of 35–55 percent per decade. To reconcile persistent hyperspecialization in exporting with evanescence in export capability, the authors specify a generalized logistic diffusion for comparative advantage which has a generalized gamma as a stationary distribution. The results provide an empirical road map for dynamic theoretical models of the determinants of comparative advantage.

Andrew Bernard and Andreas Moxnes, Dartmouth College and NBER, and Karen Helene Ulltveit-Moe, University of Oslo

Two-Sided Heterogeneity and Trade

Empirical studies of firms within industries consistently report substantial heterogeneity in measures of performance such as size and productivity. Bernard, Moxnes, and Ulltveit-Moe explore the consequences of joint heterogeneity on the supply side (sellers) and the demand side (buyers) in international trade using a novel transaction-level dataset from Norway. Domestic exporters as well as foreign importers are explicitly identified in each transaction to every destination. The buyer-seller linked data reveal a number of new stylized facts on the distributions of buyers per exporter and exporters per buyer, the matching among sellers and buyers, and the variation of buyer dispersion across destinations. The authors develop a model of trade with heterogeneous importers as well as heterogeneous exporters where matches are subject to a relation-specific fixed cost. The model matches the stylized facts and generates new testable predictions emphasizing the importance of importer heterogeneity in explaining trade patterns.

Natalia Ramondo, University of California at San Diego; Andres Rodriguez-Clare, University of California at Berkeley and NBER; and Milagro Saborio-Rodriguez, University of Costa Rica

Trade, Domestic Frictions, and Scale Effects

Theories of innovation-led growth naturally lead to aggregate scale effects. By themselves, such scale effects would make large countries much richer than small countries. The fact that the gains from trade decrease with country size weakens such scale effects, but Ramondo, Rodriguez-Clare, and Saborio-Rodriguez show that they remain much stronger than anything they find in the data. They build a model with trade and scale effects where countries are composed of multiple regions facing domestic trade frictions. The calibrated model is largely consistent with the data. For example, for a small and rich country like Denmark, the calibrated model implies a real per capita income of 88 percent (relative to the United States), much closer to the data (91 percent) than the trade model with no domestic frictions (41 percent). More generally, the authors show that by weakening scale effects, domestic frictions are key in reconciling the gravity model of trade with the cross-country patterns observed in the data for total factor productivity, relative income levels, and trade shares.

John McLaren, University of Virginia and NBER, and Gihoon Hong, Indiana University South Bend

Are Immigrants a Shot in the Arm to the Local Economy?

Most research on the effects of immigration focuses on the effects of immigrants as additions to the supply of labor. Hong and McLaren study the effects of immigrants on local labor demand resulting from the increase in consumer demand for local services created by immigrants. This effect can attenuate downward pressure from immigrants on non-immigrants' wages, and also benefit non-immigrants by increasing the variety of local services available. For this reason, immigrants can raise native workers' real wages, and each immigrant could create more than one job. Using U.S. Census data from 1990 and 2000, the authors find considerable evidence for these effects. Each immigrant creates two local jobs, and 83 percent of these jobs are in non-traded services. Immigrants appear to raise local non-tradables sector wages and to attract native-born workers from elsewhere in the country. Overall, it appears that local workers benefit from the arrival of more immigrants.

Volker Nocke, University of Mannheim, and Stephen Yeaple, Pennsylvania State University and NBER

Globalization and Multiproduct Firms (NBER Working Paper 19409)

Nocke and Yeaple present an international trade model with multiproduct firms. Firms are heterogeneously endowed with two types of capabilities that jointly determine the trade-off within firms between managing a large portfolio of products and producing at low marginal cost. The model can explain many of the documented cross-sectional correlations in firm performance measures, including why larger firms are more productive and more diversified, and yet more diversified firms trade at a discount. Globalization is shown to induce heterogeneous responses across firms in terms of scope and productivity, some of which are consistent with existing empirical work, while others are potentially testable.

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us