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    Trade Chaney Slides

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    Hector Perez Saiz
    The document summarizes Thomas Chaney's model of international trade with an extensive margin. It introduces assumptions of asymmetric countries and firms with Pareto productivity distributions. It then presents the key equations showing how trade flows, export thresholds, aggregate prices and the gravity equation depend on parameters like variable trade costs, fixed costs, and country sizes. The model generates higher trade elasticities than previous models and separates the effects of variable and fixed costs on extensive and intensive margins of trade.

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    © All Rights Reserved
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    Trade Chaney Slides

    Uploaded by

    Hector Perez Saiz
    140 views17 pages
    The document summarizes Thomas Chaney's model of international trade with an extensive margin. It introduces assumptions of asymmetric countries and firms with Pareto productivity distributions. It then presents the key equations showing how trade flows, export thresholds, aggregate prices and the gravity equation depend on parameters like variable trade costs, fixed costs, and country sizes. The model generates higher trade elasticities than previous models and separates the effects of variable and fixed costs on extensive and intensive margins of trade.

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    The document summarizes Thomas Chaney's model of international trade with an extensive margin. It introduces assumptions of asymmetric countries and firms with Pareto productivity distributions. It then presents the key equations showing how trade flows, export thresholds, aggregate prices and the gravity equation depend on parameters like variable trade costs, fixed costs, and country sizes. The model generates higher trade elasticities than previous models and separates the effects of variable and fixed costs on extensive and intensive margins of trade.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    140 views17 pages

    Trade Chaney Slides

    Uploaded by

    Hector Perez Saiz
    The document summarizes Thomas Chaney's model of international trade with an extensive margin. It introduces assumptions of asymmetric countries and firms with Pareto productivity distributions. It then presents the key equations showing how trade flows, export thresholds, aggregate prices and the gravity equation depend on parameters like variable trade costs, fixed costs, and country sizes. The model generates higher trade elasticities than previous models and separates the effects of variable and fixed costs on extensive and intensive margins of trade.

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    © All Rights Reserved
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    of 17

    International Trade

    Lecture 4: the extensive margin of trade

    Thomas Chaney

    Sciences Po

    Thomas Chaney (Sciences Po) International Trade 1 / 17


    Target of the paper

    Explain the observed role of the extensive margin of trade.


    Determin in such a model what parameters govern the elasticity of
    trade flows with respect to trade barriers.

    Thomas Chaney (Sciences Po) International Trade 2 / 17


    New assumptions (versus Melitz)

    Many asymmetric countries with asymmetric trade barriers.


    No free entry: number of firms directly proportional to country size
    (can be relaxed).
    Pareto distributed productivity shocks (delivers closed form solutions).
    1 extra numéraire sector as in Helpman-Krugman pins down relative
    wages (can be relaxed).

    Thomas Chaney (Sciences Po) International Trade 3 / 17


    Set-up

    CES/Cobb-Douglas preferences,
    0 1 s s 1 (1 µ)
    ˆ
    µ s 1
    U⌘ qo @ q (w ) s d wA
    W

    N asymmetric countries: sizes (Li )N N


    i =1 , trade barriers, ( tij , fij )i,j =1 .

    Thomas Chaney (Sciences Po) International Trade 4 / 17


    Productivity distribution and entry

    Pareto distribution for productivities j 2 [1, +•),


    q
    P ( j > F) = F
    with q > s 1.

    Note: Pareto distributions are invariant to truncation,


    ✓ ◆ q
    ⇤ F P ( j > F)
    P ( j > F| j > j ) = ⇤
    =
    j j⇤ q

    In country n, Ln potential entrants.

    Thomas Chaney (Sciences Po) International Trade 5 / 17


    Ownership structure

    Without free entry, ownership structure matters.


    Aggregate world profits (P) equally distributed across workers.
    Aggregate income in country i,
    P
    (1 + ) Li
    L

    Thomas Chaney (Sciences Po) International Trade 6 / 17


    Zero cutoff profit conditions

    Sales by firm j from country i in country j,


    ✓ ◆1 s ✓ ◆
    stij P
    rij ( j) = ⇥µ 1+ Lj
    (s 1) jPj L

    Only firms with j jij⇤ from i export to j,

    1 ⇣ ⌘s 1
    1
    1
    pij jij⇤ = 0 , jij⇤ = l1 fijs 1
    Pjs Lj tij (ZCPi j)

    Entry threshold into j depends on prices in j.

    Thomas Chaney (Sciences Po) International Trade 7 / 17


    Aggregate prices

    Prices in j depends on which firms able to enter j,

    N ˆ•
    Pj1 s = Â Lk pkj ( j)1 s
    dG ( j)
    k =1 ⇤
    jkj

    N ˆ• ✓ ◆s 1
    s 1 j
    = Â Lk s
    ⇥
    tkj
    dG ( j)
    k =1 ⇤
    jkj
    N ✓ ◆s 1
    q s 1 1
    = Â Lk q (s 1) s
    ⇥
    tkj
    ⇤s
    jkj 1 q

    k =1

    Thomas Chaney (Sciences Po) International Trade 8 / 17


    Aggregate prices

    Prices in j depends thresholds of entry into j.


    Threshold of entry into j depends on prices in j.
    Simple solution for prices,
    ✓ ◆ 1q
    Lj 1
    Pj = l 2 ⇥ ⇥ ( Lj ) s 1 ⇥ rj
    L
    N
    (sq1 1)
    with rj q
    ⌘ Â sk ⇥ tkj q ⇥ fkj
    k =1

    rj is an aggregate measure of j’s remoteness from the rest of the


    world (due to both fixed and variable costs).

    Thomas Chaney (Sciences Po) International Trade 9 / 17


    Equilibrium exports and selection

    Firm level exports (r ), thresholds of export ( j̄), and aggregate profits


    ( P ),
    8 ⇣ ⌘ s q 1 ⇣ ⌘s 1
    < Lj r
    rij ( j) = l 3 ⇥ L ⇥ tijj ⇥ js 1 , if j jij⇤
    : 0 , otherwise
    ✓ ◆ 1q ✓ ◆ 1
    L tij
    jij⇤ = l4 ⇥ ⇥ ⇥ fijs 1
    Lj rj
    P = l5 ⇥ L

    1 Note: elasticity of rij w.r.t. tij is


    (s 1) as in Krugman.
    2 Note: aggregate income elasticity of firm level exports < 1.

    Thomas Chaney (Sciences Po) International Trade 10 / 17


    Gravity equation

    Aggregate exports from i to j, Chaney versus Krugman,


    8 ⇣ ⌘ q
    >
    < X Chaney = l Li Lj tij ( q 1)
    ij L rj fij s 1
    ⇣ ⌘ ( s 1)
    >
    : X Krugman = l̃ Li Lj tij
    ij L r̃j

    1 Higher elasticity of trade w.r.t. variable trade barriers, q > s 1.


    2 Elasticity does not depend on the elasticity of substitution s.
    q
    3 Elasticity w.r.t. fixed costs, s 1 1 , is negatively related to the
    elasticity of substitution s.
    4 Both elasticities are higher in sectors where firms’ productivity is less
    dispersed (q large).

    Thomas Chaney (Sciences Po) International Trade 11 / 17


    Gravity equation

    Similar structure, Chaney and Krugman,


    8 ⇣ ⌘ q
    >
    < XijChaney = l LiLLj trij ( s q 1 1) sr
    f ij = l N i sij r Lj
    j Âk =1 k kj
    ⇣ ⌘ ( s 1)
    >
    : X Krugman = l̃ Li Lj tij s r̃
    ij L r̃j = l̃ N i sij r̃ Lj
    Âk =1 k kj
    8
    < ( q 1)
    rij = tij q fij s 1
    with
    : r̃ = t (s 1)
    ij ij

    Exports from i depends on trade barriers from i relative to weighted


    average of trade barriers from k’s.

    Thomas Chaney (Sciences Po) International Trade 12 / 17


    Intensive versus extensive margins

    Average size of exporters versus number of exporters,


    8 h i
    < E rij ( j) | j jij⇤ = l0 fij
    ⇣ ⌘
    : N = l Li Lj tij q f ( s 1 1)
    q

    ij 0
    l fij L rj ij

    Problem 1: relative exports conditional on export vary a lot,


    ✓ ◆1 s
    rij ( j) tij
    =
    rik ( j) j jij⇤ ,jik
    ⇤ tik

    Possible fix: t random shocks + Arkolakis (2008).


    Problem 2: average exports decrease with distance.
    Possible fix: global fixed export costs (Hanson & Xiang 2008).

    Thomas Chaney (Sciences Po) International Trade 13 / 17


    Intensive versus extensive margins

    ! ✓ ◆
    •
    ∂rij ( j) ∂jij⇤
    ˆ
    ⇤ ⇤
    dXij = dG ( j) d tij r jij g jij ⇥ d tij
    jij⇤ ∂tij ∂tij
    ! ✓ ◆
    •
    ∂rij ( j) ∂jij⇤
    ˆ
    ⇤
    + dG ( j) dfij r ( j̄ij ) g jij ⇥ dfij
    jij⇤ ∂fij ∂fij
    | {z } | {z }
    Intensive margin Extensive margin

    Thomas Chaney (Sciences Po) International Trade 14 / 17


    Intensive versus extensive margins

    d ln Xij
    z⌘ = (s 1) +(q (s 1)) = q
    d ln tij | {z } | {z }
    Intensive margin Extensive margin
    Elasticity Elasticity
    ✓ ◆
    d ln Xij q q
    x⌘ = 0
    |{z} + 1 = 1
    d ln fij s 1 s 1
    Intensive margin
    Elasticity
    | {z }
    Extensive margin
    Elasticity

    ∂z ∂x
    ) = 0 and <0
    ∂s ∂s

    Thomas Chaney (Sciences Po) International Trade 15 / 17


    Some empirics (size distribution and gravity)

    ln (Distanceij ) -.9 -.8 -.7


    (.04)*** (.04)*** (.04)***
    dqh
    ⇥ ln (Distanceij ) -.09 -.09
    sh 1
    (.002)*** (.003)***
    Languageij .3 1.6 -.4
    (.1)*** (.2)*** (.02)**
    dqh
    sh 1 ⇥Languageij -.4 .4
    (.05)*** (.05)***
    Borderij .8 3.9 1.4
    (.02)*** (.3)*** (.3)***
    dqh
    sh 1 ⇥Borderij -.7 -.3
    (.008)*** (.08)*
    R2 30% 31% 23% 25% 32%
    Number of obs. 65,687 65,687 65,687 65,687 65,687
    Thomas Chaney (Sciences Po) International Trade 16 / 17
    Some empirics (differentiation and gravity)

    ln (Distanceij ) -.8 -1 -.9


    (.02)*** (.02)*** (.02)***
    ŝh ⇥ ln (Distanceij ) .02 .015
    (.001)*** (.001)***
    Languageij .4 1.2 .5
    (.04)*** (.09)*** (.05)***
    ŝh ⇥Languageij -.02 -.02
    (.004)*** (.004)***
    Borderij .5 2.3 .6
    (.08)*** (.1)*** (.09)***
    ŝh ⇥Borderij -.04 -.01
    (.006)*** (.006)*
    R2 39% 40% 33% 35% 41%
    Number of obs. 270,607 257,583 257,583 257,583 257,583

    Thomas Chaney (Sciences Po) International Trade 17 / 17

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