Trade Models, Trade Elasticities, and the Gains from Trade

NBER Working Paper No. 20495

Issued in September 2014

NBER Program(s):International Trade and Investment



We argue that the welfare gains from trade in new 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 micro-level 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. The results are robust to incorporating into the estimation moment conditions that use trade-flow and tariff data, which imply a common trade elasticity across models.

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Document Object Identifier (DOI): 10.3386/w20495

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