Uncertainty and Trade Elasticities

Using Brazilian export data that, unlike many trade data sets, keep a full record of small export sales, this paper reconsiders trade elasticities and the welfare gains from trade. Using the Brazilian data, this paper provides novel evidence on the properties of the distributions of log-export sales and shows that the Double Exponentially Modified Gaussian (EMG) distribution parsimoniously captures these properties. Using the Double EMG distribution in a standard monopolistic competition model of trade, this paper demonstrates that data truncation, that is prevalent in many data sets, leads to an upward bias in measuring the partial elasticity of trade with respect to variable trade costs. This bias subsequently leads to the underestimation of the gains from trade by 1% to 9% depending on the extent of data truncation, a range that is commensurate with typical economic growth and large booms.