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Gains from Trade Liberalization with Flexible Extensive Margin Adjustment

Chang-Tai Hsieh (), Nicholas Li (), Ralph Ossa () and Mu-Jeung Yang ()
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Chang-Tai Hsieh: Booth School of Business, University of Chicago, Chicago, United States
Ralph Ossa: Department of Economics, University of Zurich, Zurich, Switzerland
Mu-Jeung Yang: Department of Economics, University of Oklahoma, Norman, United States

No 83, Working Papers from Ryerson University, Department of Economics

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.

Keywords: welfare; gains; trade; liberalization; agreement; intra-industry; selection; extensive margin (search for similar items in EconPapers)
JEL-codes: F12 F14 F15 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2022-01
New Economics Papers: this item is included in nep-int
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