The Intensive Margin in Trade
IMF Working Papers, December 7, 2018
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Bibliographic details
- Authors: Peter J. Klenow, Sergii Meleshchuk, Martha Denisse Pierola
- Published: December 7, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484386170.001
Key findings
- Around 50 percent of variation in exports is along the extensive margin (the number of firms exporting).
- The remaining 50 percent of variation is along the intensive margin (exports per exporting firm).
- A special-case Melitz model with Pareto-distributed firm productivity predicts that, conditional on fixed costs of exporting, all variation in exports across trading partners should occur on the extensive margin; this prediction contradicts the empirical EDD evidence.
- Moving from a Pareto to a lognormal productivity distribution allows the Melitz model to match the observed role of the intensive margin in the World Bank’s Exporter Dynamics Database (EDD).
Data and methodology
- Data source: World Bank’s Exporter Dynamics Database (EDD) featuring firm-level exports from 50 countries.
- Model estimation: Likelihood methods applied to a generalized Melitz model with a joint lognormal distribution for firm-level productivity, fixed costs, and demand shifters.
- Quantification technique: “Exact hat algebra” used to quantify effects of a decline in trade costs on trade flows and welfare in the estimated model.
Comparative results and implications
- Welfare effects in the estimated Melitz-lognormal model are quite close to those in the standard Melitz-Pareto model when the Pareto shape parameter is chosen to fit the average trade elasticity implied by the estimated Melitz-lognormal model.
- Despite similar welfare effects under that calibration, there are significant differences between the Melitz-lognormal and Melitz-Pareto models regarding the effects on trade flows (notably the division between extensive and intensive margins).
Policy-relevant insights
- Empirical importance of the intensive margin implies that policies and reforms affecting firm-level export performance (export values per exporter) can be as important for aggregate exports as policies affecting firm entry into exporting.
- Models and calibrations used to evaluate trade liberalization and trade-cost reductions should account for the empirical presence of a substantial intensive margin; using Pareto assumptions may misrepresent effects on trade flows even when welfare effects appear similar under matched trade elasticities.
IMF Working Paper: "The Intensive Margin in Trade", Peter J. Klenow, Sergii Meleshchuk, Martha Denisse Pierola, Martha Denisse Pierola; December 7, 2018.
Content in this bundle
- The Intensive Margin in Trade, WP/18/259, December 2018