1. society
2. work
3. unemployment

Product Di↵erentiation, and the Composition
of Trade Across Dissimilar Nations
Ahmad Lashkaripour
Indiana University
April 23, 2015
1 / 53
Motivation
2 / 53
Background
I
Gravity Models
I
I
Characterize bilateral trade volumes
Do not deliver a systematic relationship between
exporter/importer characteristics and the commodity
composition of trade.
3 / 53
Background
I
Gravity Models
I
I
I
Characterize bilateral trade volumes
Do not deliver a systematic relationship between
exporter/importer characteristics and the commodity
composition of trade.
Recent developments
I
I
Trade between dissimilar countries (e.g. rich-poor) has
grown dramatically.
Micro-level evidence indicate that dissimilar countries trade
di↵erent goods
3 / 53
Background
I
Three modern facts concerning the composition of trade:
1. Rich countries have systematically higher trade-to-GDP
ratios
2. Rich countries export higher price goods (within categories
and at the aggregate level)
3. Distant countries trade higher price goods: The
Washington Apples effect
4 / 53
Background
I
Three modern facts concerning the composition of trade:
1. Rich countries have systematically higher trade-to-GDP
ratios
2. Rich countries export higher price goods (within categories
and at the aggregate level)
3. Distant countries trade higher price goods: The
Washington Apples effect
I
Facts 1 and 2: income per capita has a systematic e↵ect on
the composition of trade.
I
Fact 3: geography has a systematic e↵ect on the
composition of trade.
4 / 53
The Literature
I
All three facts are beyond the scope of standard gravity
models—all three concern composition!
I
Three independent blocks of literature corresponding to
each fact:
1. GDP per capita ⇥ Trade
GDP : Markusen (1986); Waugh
(2010); Fieler (2011); Caron et al. (2014)
2. GDP per capita ⇥ price composition of exports:
Flam and Helpman (1987); Hallak (2006); Matsuyama
(2000); Schott (2004); Fajgelbaum et al. (2011)
3. Distance ⇥ price composition of exports: Hummels
and Skiba (2004); Martin (2012); Irarrazabal et al. (2014)
5 / 53
This Paper
I
The remaining void: a theory that accommodates all three
facts.
I
I develop a novel view of comparative advantage that fills
this void.
I
I abstract from existing theories: e.g. non-homothetic
demand, additive trade costs.
6 / 53
This Paper
I
The remaining void: a theory that accommodates all three
facts.
I
I develop a novel view of comparative advantage that fills
this void.
I
I abstract from existing theories: e.g. non-homothetic
demand, additive trade costs.
I
I instead relax a common assumption that is inconsistent
with micro level evidence:
I
I allow for two types of goods, which o↵er di↵erent scopes
for products di↵erentiation
6 / 53
This Paper
I
The remaining void: a theory that accommodates all three
facts.
I
I develop a novel view of comparative advantage that fills
this void.
I
I abstract from existing theories: e.g. non-homothetic
demand, additive trade costs.
I
I instead relax a common assumption that is inconsistent
with micro level evidence:
I
I
I allow for two types of goods, which o↵er di↵erent scopes
for products di↵erentiation
Comparative advantage across types determines the
composition of foreign trade.
6 / 53
This Paper (continued)
I
I combine the new channel of comparative advantage with
national product di↵erentiation to construct a unified
model of trade
I
Unlike gravity models, the unified model systematically
pins down both the volume and the composition of foreign
trade.
I
I estimate the unified model and compare it to a pure
gravity model.
I
The explanatory power is substantially superior, and the
gains from trade look vastly di↵erent!
7 / 53
Theory
8 / 53
The Environment
I
There are N countries
I
Country i is characterized by
1. Population Li
2. National Product Quality ↵i
I
There are two types of goods: type H and type L
I
Firms are homogenous and monopolistically competitive
9 / 53
Demand
I
Preferences are homothetic, and described by a (three-tier)
nested-CES utility
I
The upper tier aggregates across the two types
2
I
Ui = 4
X
z2{H,L}
(Uiz )
✏ 1
✏
3
✏
✏ 1
5
✏ the elasticity of substitution between types H and L
10 / 53
Demand
I
Sub-utility Uiz is a CES aggregator across national varieties
of type z
2
31
⇢z
N
X
⇢
1
⇢
z
z
z
z
Ui = 4
↵j
Qji 5
j=1
I
↵j is the national product quality of country j
I
Qzji is the e↵ective quantity of national variety j (of type z)
Qzji
=
"ˆ
!2⌦ji
z ⇢˜z
qji
# ⇢˜1
z
d!
1
z
= Mji⇢˜z qji
I
z
qji
: quantity sold by a typical firm from country j to i
I
Mji : Number of homogenous firms selling from j to i
11 / 53
Demand
I
I
I
= 1/ (1 ⇢z ): the inter-national elasticity of
substitution
˜z = 1/ (1 ⇢˜z ): the intra-national elasticity of
substitution.
z
The demand structure nests the Armington and Krugman
models:
I
Krugman: ˜z =
differentiation
I
Armington: ˜z ! 1 =) complete national product
differentiation
z
=) no national product
12 / 53
Demand
I
I
I
I
= 1/ (1 ⇢z ): the inter-national elasticity of
substitution
˜z = 1/ (1 ⇢˜z ): the intra-national elasticity of
substitution.
z
The demand structure nests the Armington and Krugman
models:
I
Krugman: ˜z =
differentiation
I
Armington: ˜z ! 1 =) complete national product
differentiation
z
=) no national product
I allow for some degree of national product
differentiation that is the same for both types:
˜H 1
˜L 1
=
⌘⌘>1
1
1
H
L
12 / 53
Demand
I
Type H o↵ers a greater scope for product di↵erentiation
than type L
H < L () ⇢H < ⇢L
Therefore, by definition, demand for type L is
quantity-intensive and demand for type H is quality-intensive.
I
If
H
I
=
L
the model reduces to a pure gravity model.
This assumption is counter-factual, but present in all
standard gravity models
13 / 53
Demand
I
Summary of key parameters
I
I
I
✏ governs the relative spending on type H versus L
z
regulates the scope for product di↵erentiation for type z
⌘ regulates the degree of national product
differentiation in the economy
14 / 53
Nested-CES Demand Function
I
Demand in country i for varieties of type z = {H, L}
produced in country j
z
Xji
⌘
z
Mji pzji qji
= ↵j
✓
Pjiz
Piz
◆1
z
✓
Piz
Pi
◆1
✏
w i Li
I
Pi : the aggregate price index in country i
I
Piz : the price index of type z in country i
I
Pjiz : the price index of national variety j of type z
15 / 53
Supply
I
Firms are homogenous and monopolistically competitive
I
The marginal cost of producing type z in country j and
selling it in country i
mczji = ⌧ji wj
I
monopolistically competitive price:

ez
1
z
pji =
⌧ji wj = 1 +
⌧ji wj
ez 1
⌘ ( z 1)
I
I
The markup is higher for type H
Variable profits from exporting type z from country j to i
z /M
Xji
ji
z
⇡ji =
ez
16 / 53
Equilibrium
Equilibrium is a vector of wages wi and a matrix corresponding
to the number of firms Mji that satisfy:
I
Balance of payments
w j Lj =
N
X
H
L
Xji
+ Xji
i=1
I
Free entry condition
H /M
H /M
Xji
Xji
ji
ji
+
= wj f e
eH
eL
17 / 53
Volume versus Composition
I
The volume of trade for each type is described by a gravity
relationship
1
z
Xji
=
↵j Mji⌘ (⌧ji wj )1
PN
1
⌘
k=1 ↵k Mki
I
I
z
(⌧ki wk )1
Xiz
z
Xiz total spending in country i on type z
The composition of imports is determined by the relative
spending on type H versus type L:
XiH
=
XiL
✓
PiH
PiL
◆1
✏
18 / 53
Four Underlying Patterns
19 / 53
Pattern 1
I
All else equal, countries with higher national product
qualities pay higher equilibrium wages.
I
Consider two geographically identical countries: N (north)
and S (south)
↵N > ↵S =) wN > wS
I
Pattern 1 follows directly from the balance of payments
condition
20 / 53
Pattern 2
I
High-wage countries have comparative advantage in type H
I
From the (type-specific) gravity equation we have
✓
◆
H /X L
Xji
⌧ji wj L H
ji
=
H /X L
⌧ki wk
Xki
ki
I
North exports relatively more of type H than South
✓
◆
H /X L
XN
wN L H
i
Ni
=
>1
H /X L
wS
XSi
Si
I
N has absolute quality-advantage in both types =) higher
wages in N
I
Higher wages in N make it comparatively disadvantaged in
the less di↵erentiated type L, which is price-sensitive.
21 / 53
Pattern 2
I
How does this view of comparative advantage fit with the
conventional view?
I
Conventional view: countries have comparative
advantage in a good for which they have a lower autarky
relative price (Deardor↵ (1980)).
I
Here, comparative advantage is determined based on the
autarky price index.
I
The autarky relative price index of type H is lower in N :
✓
PNH
PNL
◆Autarky
<
✓
PSH
PSL
◆Autarky
22 / 53
Pattern 3
I
In the trade equilibrium, the price index of type H
relative to type L is lower in high-income countries
I
Type L is relatively cheaper in the South, and type H is
relatively cheaper in the North
✓
I
PNH
PNL
◆Autarky
PH
PH
< NL < SL <
PN
PS
✓
PSH
PSL
◆Autarky
Only with free trade prices will be equalized across
countries with similar characteristics
23 / 53
Pattern 4: The Home Production E↵ect on
Consumption
I
Rich countries spend relatively more on type H
I
Given that
XiH
XiL
=
⇣
PiH
PiL
⌘1
✏
, then
H
PNH
PSH
XN
XSH
<
=)
>
L
PNL
PSL
XN
XSL
I
This is the opposite of the Home market effect
highlighted by Krugman (1980).
I
Despite homothetic preferences the consumption structure
is fundamentally di↵erent across rich and poor countries.
24 / 53
The Three Stylized Facts
Concerning Composition
25 / 53
Trade-to-GDP ⇥ Income per capita
I
Rich countries have systematically higher Trade
GDP because
they produce and consume relatively more of type H
I
1
Type H is more tradeable: ⌧ji
I
H
1
⌧ ⌧ji
L
Type H pays a lower e↵ective trade cost.
I
Economic activity in S is concentrated around type L
XL
( XSS ⇡ 1)
⇥
⇤
L
(Trade/GDP)S ⇡ 1
SS ⇡ 0
I
Economic activity in N is concentrated around type H
XL
( XN
⇡ 1)
N
⇥
(Trade/GDP)N ⇡ 1
H
NN
⇤
⇡1
1+ 1 X 1+ ⌘1
↵N ⌘ /
↵k
k
!
26 / 53
Export Price ⇥ Income per capita
I
Rich countries have systematically higher export prices
because they export relatively more of type H
I
Average price of exports from country j to i
!
!
H
L
Xji
X
ji
p¯ji =
pH
pL
ji +
ji
Xji
Xji
L
Type H exhibits a higher markup and a higher price: pH
ji > pji
H
@ p¯ji
@ Xji
> 0 =)
>0
L
@↵j Xji
@↵j
27 / 53
Export Price ⇥ Distance
I
Distant countries trade relatively more of type H
I
Average price of exports from country j to i
!
!
H
L
Xji
Xji
H
p¯ji =
pji +
pL
ji
Xji
Xji
I
Remote exporters face higher trade costs and are
price-disadvantaged =) sell relatively more of type H,
which is price-insensitive.
H
@ p¯ji
@ Xji
> 0 =)
>0
L
@⌧ji Xji
@⌧ji
28 / 53
A Special Case: The Pure Gravity Model
I
If H =
model:
L
=
the model reduces to a pure gravity
1
Xji =
↵j Mji⌘ (⌧ji wj )1
P
1
1
⌘
k2C ↵k Mki (⌧ki wk )
Xi
I
The pure gravity model only charecterizes the volume
of trade =) cannot explain the three stylized facts
concerning composition.
I
When ⌘ ! 1 and f e = 0, the pure gravity model reduces
to an Armington model:
Xji = P
↵j (⌧ji wj )1
k2C
↵k (⌧ki wk )1
Xi
29 / 53
Estimation
30 / 53
Data
I
Bilateral merchandise trade flows in 2000 from the U.N.
Comtrade database.
I
Sample of 100 countries
I
95% of the world trade in 2000.
I
The countries are vastly dissimilar
31 / 53
Parametrizing Trade Cost
I
Assume a parametric relationship between trade costs and
bilateral observables:
⌧ji = 1 + [const + dist distji ] border lang agreement
I
dist ⇥ distji : the e↵ect of distance
I
border : the e↵ect of sharing a border
I
lang : the e↵ect of a common language
I
agreement : the e↵ect of a trade agreement
32 / 53
Estimated Parameters
I
I
✏: elasticity of substitution between type H and L
H:
I
I
the scope for product di↵erentiation for type H
I cannot separately identify both
Normalize L = 6
L
and
H
I
⌘: the degree of national product differentiation
I
Parameters corresponding to trade costs:
 = {border , lang , agreement , const , dist }
33 / 53
Estimation Strategy
I
Inner loop: fix the estimated parameters
1. Given a vector of national product qualities ↵i , solve
for Mji using the free entry condition
2. Update ↵i given Mji from the previous step using the
balance of payments condition
3. Iterate over steps 1 and 2 until both conditions are satisfied
4. Calculate the matrix of trade shares
I
Outer loop (NLLS)
I
Search for the parameters that minimize the distance
between simulated trade shares and data.
34 / 53
Estimation Results
Parameters
Unified model
Pure gravity
Restricted gravity
L (Normalized)
6
4.6
4.6
H
3.27
(0.025)
2.78
(0.011)
3.16
(0.024)
2.16
(0.017)
0.11
(0.002)
0.57
(0.01)
0.87
(0.007)
0.71
(0.013)
...
...
...
...
2.63
(0.019)
1.96
(0.020)
0.19
(0.003)
0.69
(0.013)
0.72
(0.006)
0.80
(0.013)
...
0.96
(0.027)
0.83
(0.006)
0.27
(0.009)
0.37
(0.005)
1.17
(0.011)
0.43
0.30
0.24
(Armington model)
✏
⌘
const
dist
border
lang
agreement
Goodness of fit
(R-squared)
35 / 53
The unified model vs. Pure Gravity
I
The superior fit of the unified model comes from fitting
two aspects of the trade volumes, which are beyond the
scope of pure gravity models:
1. Margin 1: the systematically higher trade-to-GDP ratio of
rich countries
2. Margin 2: the lower sensitivity to distance of export flows
from rich countries
I
In the unified model import/export elasticities are
endogenously determined by the composition of a nation’s
trade.
I
In the pure gravity model import/export elasticities are
the same for all countries.
36 / 53
Trade-to-GDP in the Data
Data
SGP
0
MYS
AGO
PHL BLR
BEL
IRL
HUN
THA
CZE
TWN ARE
SVNBHR
NLD
LUX
QAT
OMN
SAU
KWT CAN
CHE
SWE
AUT
LKA
KOR
FIN
ROM
IDN
NGA YEM
HRV MEX
ECU JOR
MAR
CIV
PRT
DOM JAM
YUG
NZL ISR DEU DNK
ISL NOR
RUS
CHN
CYP
LBY
DZA
CHL
SYRPRY
BWAPOL
ZAF
FRA
IRN
ESP
GBR
LBN
SLV
ZWE
ITA
TUR
CMR
VEN
KEN
GRC
AUS
BOL
COL
BGD
URY
SDN PAK
UZB
PER
VNM
−2
−1
UKR
ETH
BGR
TUN
KAZ
LTU CRI
LVA
TTO
TZA
UGA
EGY
IND
BRA
ARG
USA
JPN
−3
Log( trade−to−GDP ratio )
HKG
SVK
−6
−4
−2
0
Log( GDP per worker: US=1 )
37 / 53
Trade-to-GDP in the unified model
0
The Unified model
−1
ISL
QAT
IRL
BEL
AUT DNK
CHE
FIN
NOR
CAN
HKG
NLD
SWE
SGP
−2
PRY
ETH
UGA
SDN
KENYEM
UKR
ZWE
CMR
−3
TZA
UZB
VNM PAK
CIV
AGO
NGA
BGD
JOR
YUGBLRBGR
BOL
SYR
TUN
KAZ
ARE
URY SVN CYP KWTFRA
BHR
PRT
ISR DEU
LVA
MEX
LTU
GRC ESP ITA
SVK
CZE OMN
MYS
LBN
HRV
BWA
GBR
LBY
HUN TTO
JAM POL
MAR ROM
DZA
RUS
ECU
EGY
DOM
SLV
CRI
IRN COL
PER TUR
VEN
THA
CHL
LKAPHL
CHN
IDN
IND
SAU
ARG
NZL
TWN
KOR
ZAF
AUS
USA
BRA
JPN
−4
Log( trade−to−GDP )
LUX
−6
−4
−2
0
Log( GDP per worker (US=1) )
38 / 53
Trade-to-GDP in the pure gravity model
0
The Pure Gravity Model
LUX
−2
ETH
JOR
BEL
YUG
LVA
TUN
BOL
LTU
LBN URY SVNBHR
YEM
IRLQAT
BLRBGR
AUT
CMR
SYR
CYP
JAM
SVK
BWA
HRV
TTO OMN
KEN ZWE
ISLCHE
LBY
TZA
MAR
UKR
ECU DZA
KAZ
FIN
CZE
KWT CAN
CIV
HUN
SLV
DNK
ROM
UZB
PAK
CRI
PRT
DOM
NLD
ARE
GRC
AGO
MYS
SWE
EGY PER
SGP
VNM
NGA
POL
ISRFRA
COL
HKG
LKA
DEU
SAU
CHL
NOR
PHL
BGD
ESP
IRN
VEN
RUS
TUR
ITA
ARG
GBR
THA
MEX
IND
UGA
SDN
−4
IDN
CHN
ZAF
TWN
NZL
BRA
KOR
USA
AUS
JPN
−6
Log( trade−to−GDP )
PRY
−6
−4
−2
0
Log( GDP per worker (US=1) )
39 / 53
North vs South Export Flows – Data
Data
−10
−15
X
ln X i Xi j j
−20
−25
North
South
South
North
−30
−35
−3
−2
−1
0
1
2
3
ln( d i s t i j)
40 / 53
North vs South Export Flows – Unified model
The unified model
−12
−14
−18
X
ln X i Xi j j
−16
−20
−22
North
South
South
North
−24
−26
−3
−2
−1
0
1
2
3
ln( d i s t i j)
41 / 53
North vs South Export Flows – Pure Gravity
Model
The Gravity model
−15
−20
X
ln X i Xi j j
−25
−30
−35
−40
−45
−3
North
South
South
North
−2
−1
0
1
2
3
ln( d i s t i j)
42 / 53
The Gains from Trade
43 / 53
Two Counterfactual Analyses
I
Welfare in country i is given by the real wage:
Wi =
wi
Pi
1. I quantify the realized gains by comparing the
counterfactual autarky real wage with the actual real wage
2. I quantify the prospective gains from marginally lowering
the trade costs by 10%.
44 / 53
JPN
USA
BRA
ARG
AUS
KOR
CHL
ZAF
TWN
VEN
NZL
IDN
PER
COL
THA
IND
CHN
LKA
BGD
CRI
ECU
PHL
SAU
IRN
AGO
TUR
SLV
VNM
DOM
NGA
PAK
BWA
TZA
ZWE
EGY
CIV
GBR
UZB
BOL
KAZ
KEN
LBY
MYS
ROM
CMR
YEM
DZA
RUS
MAR
URY
POL
TTO
JAM
UKR
OMN
ETH
ISR
HUN
UGA
SDN
ITA
SYR
HRV
LBN
TUN
ESP
BGR
SGP
BLR
LTU
DEU
ARE
YUG
KWT
LVA
HKG
GRC
JOR
SVK
CZE
BHR
PRY
FRA
PRT
CYP
SVN
MEX
NOR
SWE
NLD
FIN
CAN
CHE
DNK
AUT
QAT
BEL
IRL
ISL
LUX
The Unified Model
The Pure Gravity Model
0
10
20
30
40
The gains from trade relative to autarky
50
The Realized Gains from Trade
Unified model vs pure gravity model
The average gains from trade
relative to autarky
The coefficient of variation of the
gains (across countries)
The unified model
4.45 (per cent)
1.10
The pure gravity model
2.38 (per cent)
0.84
I
The gains from trade are about 200% larger in the unified
model.
I
The gains are also more unequally distributed across
nations.
46 / 53
Why are the gains larger in the unified model?
I
Short answer:
I
the unified model combines systematic across-product
specialization and within product trade.
I
pure gravity models focus only on within product trade.
47 / 53
Why are the gains larger in the unified model?
I
Long Answer: Following Arkolakis et al. (2012), the
gains from trade depend on ii (1 Trade
GDP ) and e (trade
elasticity):
Gainsi ⇠
ii
1
e
I
The pure gravity model understates the gains for rich
nations because it understates their Trade
GDP .
I
The pure gravity model understates the gains for poor
nations because it forces their trade elasticity to be the
same as rich countries.
I
In the Unified model, poor countries are net importers of
highly-di↵erentiated types =) sizable gains despite low
Trade
GDP
48 / 53
The Prospective Gains From Trade
Rich vs Poor Countries
The Unified model
PRY
5
ETH
UGA
TZA
JOR
CZE
YUGBLR
JAM
LVA POL
LTU
SYR BGRTUN
SVK
BOL
YEMUKR
LBN
HRV
DZA
MAR ROM
CMR
PRT
KEN
KAZEGY
HUN
SVN
RUS DOM
UZB
ZWE
NGA PAK
TTO
SLV TUR
URY
PHL ECU
VNM CIV
GRC
MYS
BWA
IRN COL
CRI
BGDIND AGO LKA
LBY
THA
CHN
OMN
PER
IDN
ESP
ZAF
VEN
SAU
BRA CHL
SDN
ARG
CAN
BEL
IRL ISL
AUT
QAT
FIN DNK
ITAFRA
NLD
DEU
CHE
GBR
SWE
AUS
JPN
USA
ISR
KWT
KOR
NZL
BHR
TWN
CYP
0
The prospective gains from trade
10
MEX
NOR
ARE
−5
SGP
HKG
−6
−4
−2
0
Log( GDP per worker (US=1) )
15
The Pure Gravity Model
10
JOR
BEL
BOL
YUG
UGA
SDN
5
ETH
TZA
0
The prospective gains from trade
PRY
−6
YEM
CMR
ZWE
TUN
BLRBGR
SYR
LVA
LTU
JAM
IRL
URY
LBN
BWA
SVK
HRV
TTO
SVNBHR
CYP
OMN
AUTQAT
ISLCHE
KEN
ECU
KAZ
LBY
UKR
MAR
FIN
CZE
SLV
DZA
KWT
PAK
CRI
DNK
CIV
UZB
PRT
ROM DOM
MYSHUN
VNM
SGP
GRC
HKG
AGO
PER
ARE
NLD
NGA
POL
ISRFRASWE NOR
LKAPHL
EGY COL
CHL
BGD
VEN
ESP
MEX
IRN
RUS
SAUKORNZL
THA
TUR
ARG
TWN ITA
IND
DEU
IDN
GBR USA
CHN
ZAF
BRA
AUS
JPN
−4
−2
Log( GDP per worker (US=1) )
CAN
0
49 / 53
The Prospective Gains From Trade
30
BRA
ZAF
20
CHN
MEX
IDN
IND
10
RUS
TUR
IRN
THA
KOR
POL
SAU
EGY
PHL
NGA
BGD
VEN
LKA
COL
FRA GRC
AGOPER
PRT
HUN
CZE ROM
VNM
MYS
GBR
UZB PAK
DOM
DZA
CIV
CAN
UKR
MAR
CRI
SLV
KAZ
KEN TZA
HRV BGR LBY NLDISL
ECUTWN
SYR
SVK
BLR
SDN
ZWE
LUX
CMR
LBN JAM
ETH
LTU
TTO
YEM
DNK
TUN BWA
OMN
AUT
YUG
UGA
LVASVN
BEL
JOR
URY PRY
QAT BOL
SWE FIN IRL
CHE
BHR CYP
ITAESP
DEU
0
The prospective gains from trade (unified/gravity)
The E↵ect of Remoteness
0
5
CHL
NZL
ARG
10
Remoteness
50 / 53
The Prospective Gains From Trade
I
Compared to the pure gravity model, the prospective
gains in the unified model systematically favor poor and
remote countries.
I
Why?
51 / 53
The Prospective Gains From Trade
I
Compared to the pure gravity model, the prospective
gains in the unified model systematically favor poor and
remote countries.
I
Why?
I
Given the existing impediments to trade, poor and remote
countries are predominantly importing the
highly-di↵erentiated type.
I
Partially removing these impediments allows poor and
remote countries to import more of the
highly-di↵erentiated type.
I
Highly-di↵erentiated varieties are not easily substitutable
with domestic counter-parts, so they bring along sizable
welfare gains.
51 / 53
53 / 53
Arkolakis, C., A. Costinot, and A. Rodriguez (2012). Clare,
2012, new trade models, same old gains. American Economic
Review 102 (1), 94.
Caron, J., T. Fally, and J. R. Markusen (2014). International
trade puzzles: A solution linking production and preferences.
The Quarterly Journal of Economics 129 (3), 1501–1552.
Deardor↵, A. V. (1980). The general validity of the law of
comparative advantage. The Journal of Political Economy,
941–957.
Fajgelbaum, P., G. M. Grossman, and E. Helpman (2011).
kincome distribution. Product Quality, and International
Trade, lJournal of Political Economy 118 (4), 721.
Fieler, A. C. (2011). Nonhomotheticity and bilateral trade:
evidence and a quantitative explanation.
Econometrica 79 (4), 1069–1101.
Flam, H. and E. Helpman (1987). Vertical product
di↵erentiation and north-south trade. The American
Economic Review , 810–822.
53 / 53
Hallak, J. C. (2006). Product quality and the direction of trade.
Journal of International Economics 68 (1), 238–265.
Hummels, D. and A. Skiba (2004). Shipping the good apples
out? an empirical confirmation of the alchian-allen
conjecture. Journal of Political Economy 112 (6).
Irarrazabal, A., A. Moxnes, and L. D. Opromolla (2014). The
tip of the iceberg: a quantitative framework for estimating
trade costs. Review of Economics and Statistics
(forthcoming).
Markusen, J. R. (1986). Explaining the volume of trade: an
eclectic approach. The American Economic Review ,
1002–1011.
Martin, J. (2012). Markups, quality, and transport costs.
European Economic Review 56 (4), 777–791.
Matsuyama, K. (2000). A ricardian model with a continuum of
goods under nonhomothetic preferences: Demand
complementarities, income distribution, and north-south
trade. Journal of Political Economy 108 (6), 1093–1120.
53 / 53
Schott, P. K. (2004). Across-product versus within-product
specialization in international trade. The Quarterly Journal
of Economics 119 (2), 647–678.
Waugh, M. (2010). International trade and income di↵erences.
The American Economic Review 100 (5), 2093–2124.
53 / 53