Essays on product variety gains from international trade

Adina Teodora Ardelean, Purdue University

Abstract

The first essay develops and tests a monopolistic competition model with a more general, but still tractable, CES preference structure that nests Krugman (1980) and Armington (1969) style models. With limited love of variety the consumer faces a trade-off between buying more varieties or higher quantities per variety and in equilibrium the model yields a variety growth rate consistent with the data. The empirics confirm that consumer's "love of variety" is forty two percent lower than is assumed in Krugman's model. One implication is that existing studies overstate the variety gains from trade liberalization. Another is that the impact of product variety on economic growth and the strength of industrial agglomerations is smaller than is typically assumed. In Romer(1994)'s model and subsequent research, the variety gains are magnified by the assumption of no or limited competition between imported and domestic differentiated products. The second essay extends the existing literature by endogenizing the domestic supply of differentiated products. In this model the countries with a stronger comparative advantage in producing differentiated products will import fewer foreign goods and enjoy lower variety gains from trade. Moreover, higher trade barriers will hurt them less because these countries are more efficient in substituting for the disappearing foreign varieties with domestic varieties. Next we take the model to the data, measuring the strength of a country's comparative advantage by its export performance. For an average good doubling the importer's export performance relative to exporter's results in a twenty percent decrease in the number of imported varieties for a median trade barrier. The effect varies across industries with 'machinery and transportation' and 'electronics' featuring the strongest effect.

Degree

Ph.D.

Advisors

Hummels, Purdue University.

Subject Area

Economics

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