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Producer Heterogeneity, Value-Added, and International Trade

Author

Listed:
  • Patrick Alexander
Abstract
Standard new trade models depict producers as heterogeneous in total factor productivity. In this paper, I adapt the Eaton and Kortum (2002) model of international trade to incorporate tradable intermediate goods and producer heterogeneity in value-added productivity. In equilibrium, this yields a positive relationship between the international trade elasticity and the share of intermediate goods in production. This relationship is absent from the standard model and is driven by the extensive margin of trade. I then use cross-country sectoral data from 1995 to 2010 and estimate the trade elasticity, finding empirical support for this relationship and for the importance of the extensive margin. This model yields results that are similar to those of the standard model with respect to the overall magnitude of gains from trade. Importantly, however, whereas the standard model suggests that gains from trade are higher in sectors that use intermediate goods, I find that this is no longer true under the value-added heterogeneity model.

Suggested Citation

  • Patrick Alexander, 2016. "Producer Heterogeneity, Value-Added, and International Trade," Staff Working Papers 16-54, Bank of Canada.
    • Handle: RePEc:bca:bocawp:16-54
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Economic models; International topics; Productivity; Trade Integration;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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