| |
| |
wiiw Seminar in
International Economics |
|
 |
Per-Capita Income and the Extensive Margin of Bilateral
Trade: A Quantitative Ricardian Model
Christian Hepenstrick, University of Zurich (UZH)
19 November 2009, 4 p.m. |
| |
|
|
| This paper
develops a Ricardian trade model that accounts for the empirically
observed positive relation between the extensive margin of a
bilateral trade flow (measured as the number of goods categories
with positive volumes) and the per-capita incomes of the trading
partners. The central mechanism is that richer agents consume
a wider set of varieties, which leads to a positive relation
between per-capita income of the importer and the extensive
margin. The positive effect of exporter per-capita income, corresponding
to the standard model, comes from the fact that technologically
advanced countries are the cheapest suppliers for many varieties.
Using aggregate trade volumes and US consumption data we calibrate
the new model and find that it captures remarkably well the
behavior of the extensive margin of trade. For example the importer
income elasticity of the extensive margin is 0.54 in the data,
whereas our model produces an elasticity of 0.48 (in contrast
to -0.40 in the standard model). We conclude the paper with
two counterfactual experiments that highlight the quantitative
importance of per-capita incomes in determining the extensive
margin of trade. |
| |
|
|
