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Geography, Value-Added and Gains From Trade: Theory and Empirics - Patrick Alexander

Date & Time:
May 12, 2015 | 3:00 pm - 4:00 pm
Patrick Alexander


Standard new trade models depict firms as heterogeneous in total factor productivity. In this paper, I first extend the Eaton and Kortum (2002)
and Melitz (2003) models of international trade to incorporate tradable intermediate inputs and firm heterogeneity in value-added productivity. In equilibrium, this yields a positive relationship between the response of international trade to changes in trade costs, the "trade elasticity", and the intermediate inputs share. This relationship is absent from the standard models and driven by the extensive margin of trade. I then use
sectoral data from the 1980s and 2000s to estimate the trade elasticity. Over both periods, I find empirical support for the positive relationship
between the trade elasticity and the intermediate inputs share and for the importance of the extensive margin. I find that the gains from
manufacturing trade are, on average, larger by 34% in the early-1980s and 57% in the early-2000s under the value-added framework relative to the standard models. I apply these results to provide explanations for the "international elasticity puzzle" and the "distance puzzle" from the
empirical trade literature.


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