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Product Variety and the Gains from International Trade

Product Variety and the Gains from International Trade

Robert C. Feenstra
Copyright Date: 2010
Published by: MIT Press
Pages: 144
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  • Book Info
    Product Variety and the Gains from International Trade
    Book Description:

    The application of the monopolistic competition model to international trade by Elhanan Helpman, Paul Krugman, and Kelvin Lancaster was one of the great achievements of international trade theory in the 1970s and 1980s. Monopolistic competition models have required new empirical methods to implement their theoretical insights, however, and in this book Robert Feenstra describes methods that have been developed to measure the product variety of imports and the gains from trade that are due to product variety. Feenstra first considers the consumer benefits from having access to new import varieties of differentiated products, and examines a recent method to estimate the elasticity of substitution (the extent of differentiation across products) and to use that information to construct the gains from import variety. He then examines claims of producer benefit from export variety, arguing that the self-selection of the more productive firms (as the low-productivity firms exit the market) can be interpreted as a gain from product variety. He makes use of a measurement of product variety known as the extensive margin of exports and imports. Finally, he considers an alternative approach to quantifying the gains due to product variety by comparing real GDP calculated with and without the extensive margin of trade.

    eISBN: 978-0-262-28937-5
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Series Foreword
    (pp. vii-viii)
    Karl Gunnar Persson

    The Zeuthen Lectures offer a forum for leading scholars to develop and synthesize novel results in theoretical and applied economics. They aim to present advances in knowledge in a form accessible to a wide audience of economists and advanced students of economics. The choice of topics will range from abstract theorizing to economic history. Regardless of the topic the emphasis in the lecture series is on originality and relevance. The Zeuthen Lectures are organized by the Institute of Economics, University of Copenhagen.

    The lecture series is named after Frederik Zeuthen, a former professor at the Institute of Economics....

  4. Preface
    (pp. ix-x)
  5. 1 Introduction
    (pp. 1-6)

    One of the great achievements of international trade theory in the latter part of the twentieth century was the incorporation of the monopolistic competition model. The early articles by Helpman (1981), Krugman (1979, 1980, 1981), and Lancaster (1980) paved the way for the incorporation of increasing returns to scale and product variety into many aspects of international trade. On the theoretical side, the impact of these ideas has been very great indeed, with the static models of the 1980s giving rise to the dynamic models of endogenous growth in the 1990s, and in the opening years of the twenty-first century,...

  6. 2 Consumer Benefits from Import Variety
    (pp. 7-38)

    We begin with the gains from trade for consumers in the monopolistic competition model due to expansion in the variety of goods available through trade. These gains are based on the idea that each country produces products that are somewhat different from other countries. Whether we are talking about automobiles, consumer electronics, or food products, or nearly any other industry, it is very plausible that firms will differentiate their products and that cross-country trade allows consumer to purchase more varieties. So this cornerstone of the monopolistic competition framework seems plausible at face value.

    From a technical point of view, measuring...

  7. 3 Producer Benefits from Export Variety
    (pp. 39-56)

    Let me turn now to the second source of gains from trade in the monopolistic competition model, which is the self-selection of firms with only the more efficient firms surviving after trade liberalization. This prediction did not come from the original models of the early 1980s because those models used the simplifying assumption that all firms are the same, producing at the same scale and with the same costs. The number of firms surviving in the market still depends on the level of tariffs, but there is no essential difference between those that drop out and those that remain. So...

  8. 4 The Extensive Margin of Trade and Country Productivity
    (pp. 57-82)

    The previous chapter has shown that the Melitz (2003) model gives rise to gains from trade on the production side of the economy. Intuitively, movements along the transformation curve in figure 3.3 due to greater export variety will be associated with higher GDP and productivity. That hypothesis is strongly confirmed empirically by Feenstra and Kee (2008), who analyze 48 countries exporting to the United States over 1980 to 2000. They find that average export variety to the United States increases by 3.3 percent per year, so it nearly doubles over these two decades. That total increase in export variety is...

  9. 5 Product Variety and the Measurement of Real GDP
    (pp. 83-108)

    In this chapter we take a new approach to measure the increase in real GDP due to import and export variety, drawing on the Penn World Table (PWT). Our goal is to quantify the gains arising from import and export variety for a broad sample of countries. The calculations in this chapter will be complementary to the simple formulas for gains implemented at the end of chapters 2 and 3, depending on the import and export shares, and to the estimation of the GDP function in chapter 4. We now want to obtain adirectmeasure of the gains from...

  10. 6 Conclusions
    (pp. 109-118)

    There are three sources of gains from trade in the monopolistic competition model: the gains from reduced markups due to competition between firms; the gains from the expansion in product varieties; and the gains due to the self-selection of firms as only the most efficient firms survive. In this volume we have not considered the first source of gains from trade—due to reduced markups. The second source of gain from trade—due to increase product variety—has received support in current research using disaggregate data. The assumption used to analyze these data is that each country provides different product...

  11. Notes
    (pp. 119-122)
  12. References
    (pp. 123-128)
  13. Index
    (pp. 129-133)