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Gains from Trade Liberalization with Flexible Extensive Margin Adjustment

Author

Listed:
  • Chang-Tai Hsieh

    (Booth School of Business, University of Chicago, Chicago, United States)

  • Nicholas Li

    (Department of Economics, Ryerson University, Toronto, Canada)

  • Ralph Ossa

    (Department of Economics, University of Zurich, Zurich, Switzerland)

  • Mu-Jeung Yang

    (Department of Economics, University of Oklahoma, Norman, United States)

Abstract

We propose a new suffcient statistic to measure the ex-post welfare gains from trade in CES models featuring any productivity distribution or pattern of selection into production and exporting. Our statistic is based on a single data moment, the change in the market share of continuing domestic producers, and a single structural parameter, the elasticity of substitution between products. We apply our statistic to measure Canada's gains from the Canada-US Free Trade Agreement using data on observed firm selection and simulated firm selection in a calibrated model with a flexible extensive margin. We find that welfare gains are substantially smaller than implied by welfare formulas that assume that the extensive margin behaves according to a standard Melitz-Pareto model with iso-elastic import demand.

Suggested Citation

  • Chang-Tai Hsieh & Nicholas Li & Ralph Ossa & Mu-Jeung Yang, 2022. "Gains from Trade Liberalization with Flexible Extensive Margin Adjustment," Working Papers 083, Toronto Metropolitan University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp083
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    File URL: https://www.arts.ryerson.ca/economics/repec/pdfs/wp083.pdf
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    More about this item

    Keywords

    welfare; gains; trade; liberalization; agreement; intra-industry; selection; extensive margin;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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