Abstract
Recent work in international economics provides insights into the measurement of product variety change - i.e., the change at the extensive margin of trade - and its consequences for a country's welfare. In such work, the measurement of product variety change is typically taken as given. There is evidence that product variety change is the main source of gains from trade (see Hummels and Klenow, 2005; and Broda and Weinstein, 2006). However, little is known as to what determines product variety growth, e.g., from an Armington perspective as here, and what we can subsequently learn for the inclination of countries, depending on their characteristics, towards trade liberalization. Results in this paper shed first light on a possible nexus between Armingtontype product variety change (i.e., product diversity by virtue of country of origin) and economic size of countries. Our future research will venture to provide an answer to the question about the key determinants of product variety and as to the heterogeneous consequences of trade liberalization across countries.
Highlights
The key mechanism behind gains from trade in New Trade Theory type models with a preference structure à la Dixit and Stiglitz (1977) is associated with gains from variety
Our research aims at shedding light on the magnitude of change in the extensive export country margin across two decades (1980–2000) for three rather heterogeneous importers: Japan, Switzerland, and the United States
It turns out that the variation in the change of the extensive margin is huge across products
Summary
The key mechanism behind gains from trade in New Trade Theory type models with a preference structure à la Dixit and Stiglitz (1977) is associated with gains from variety. An issue which is at the heart of this line of work is the measurement of the expansion or contraction of the set of varieties a country trades. Either approach leads to the same measure of of the extensive margin of trade as long as the reference year or country, respectively, is constant across the units of observation and the Armington (1969) definition of an import variety is used. Our research aims at shedding light on the magnitude of change in the extensive export country margin across two decades (1980–2000) for three rather heterogeneous importers: Japan, Switzerland, and the United States. We assume that variety at the trade product category level is determined by Armington (1969) differentiation of one and the same good according to its country of origin. We document a systematic pattern in some of the moments of the distribution of Armington variety which is correlated with country size
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