TradeModels and Trade Elasticities

This paper shows that new trade models with different micro-level margins--estimated to fit the same moments in the data--imply lower trade elasticities and, hence, larger welfare gains from trade relative to models without these margins. The key feature of the estimation approach is to focus on common moments where new micro-level margins, such as an extensive margin or variable markups, alter the mapping from the data to the estimate of the trade elasticity. We find that the introduction of an extensive margin as in Eaton and Kortum (2002) or Melitz (2003) increases the welfare cost of autarky by up to 50 percent relative to Armington or Krugman (1980) which feature no extensive margin. Variable markups in Bernard, Eaton, Jensen, and Kortum (2003) further increase the welfare cost of autarky by 50 percent relative to Eaton and Kortum (2002) which features perfect competition.