Trade Models, Trade Elasticities, and the Gains from Trade

Abstract

We argue that the welfare gains from trade in models with micro-level margins exceed those in frameworks without these margins. Theoretically, we show that for fixed trade elasticity, different models predict identical trade flows, but different patterns of microlevel price variation. Thus, given data on trade flows and micro-level prices, different models have different implied trade elasticities and welfare gains. Empirically, models with extensive or variable mark-up margins yield significantly larger welfare gains. Our trade elasticity estimates are robust over time in contrast to leading approaches that use trade-flow and tariff data, which imply a common trade elasticity across models.

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