Discrete trade

Abstract

International quality specialization (IQS) and pricing-to-market (PTM) are two of the most studied phenomena in international trade. I present new evidence that PTM and IQS are significantly more pronounced in discrete industries that involve indivisible consumption goods. In light of this observation, I develop a generalized model of international trade that accommodates both discrete and continuous industries. I argue that IQS and PTM in discrete industries are magnified by (i) affordability constraints, and (ii) cross-country differences in the price of non-traded services—both of which are less relevant in continuous industries. This prediction finds support from micro-level trade data. I then map the discrete model to macro-level data and show that the unique forces underlying the model shed fresh light on the gains from trade and the “big-push” effects of globalization.