{
  "title": "The Intensive Margin in Trade",
  "publication": "IMF Working Papers, December 7, 2018",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2018/12/07/the-intensive-margin-in-trade-46389",
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  "summary": "The Melitz model highlights the importance of the extensive margin (the number of firms exporting) for trade flows. Using the World Bank’s Exporter Dynamics Database (EDD) featuring firm-level exports from 50 countries, we find that around 50 percent of variation in exports is along the extensive ma",
  "sections": [
    {
      "heading": "Key findings",
      "content": "- Around 50 percent of variation in exports is along the extensive margin (the number of firms exporting).\n- The remaining 50 percent of variation is along the intensive margin (exports per exporting firm).\n- 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.\n- 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)."
    },
    {
      "heading": "Data and methodology",
      "content": "- Data source: World Bank’s Exporter Dynamics Database (EDD) featuring firm-level exports from 50 countries.\n- Model estimation: Likelihood methods applied to a generalized Melitz model with a joint lognormal distribution for firm-level productivity, fixed costs, and demand shifters.\n- Quantification technique: “Exact hat algebra” used to quantify effects of a decline in trade costs on trade flows and welfare in the estimated model."
    },
    {
      "heading": "Comparative results and implications",
      "content": "- 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.\n- 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)."
    },
    {
      "heading": "Policy-relevant insights",
      "content": "- 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.\n- 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.\n\nIMF Working Paper: \"The Intensive Margin in Trade\", Peter J. Klenow, Sergii Meleshchuk, Martha Denisse Pierola, Martha Denisse Pierola; December 7, 2018.\n\n---\n\n Content in this bundle\n\n- The Intensive Margin in Trade, WP/18/259, December 2018\n  - The Intensive Margin in Trade, WP/18/259, December 2018 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - The Intensive Margin in Trade, WP/18/259, December 2018 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2018/12/07/the-intensive-margin-in-trade-46389"
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    "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",
    "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 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.",
    "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).",
    "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.",
    "**The Intensive Margin in Trade, WP/18/259, December 2018**"
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