The Variety and Quality of a Nation's Trade
Not surprisingly, big countries trade more than small countries. In this paper we use data on shipments by 110 exporters to 59 importers in 5,000 product categories to ask: how? Do big countries trade larger quantities of a common set of goods (the intensive margin), a larger set of goods (the extensive margin), or higher quality goods? We find that the extensive margin accounts for two-thirds of the greater exports of larger economies, and one-third of the greater imports of larger economies. Richer countries export more units at higher prices. These calculations are useful for distinguishing features of trade models that correspond more or less well to the data. Models with Armington national product differentiation do not feature the extensive margin, and wrongly predict that greater output will be accompanied by worse terms of trade. 'Krugman' style models with firm level product differentation fare better, but must be modified to include quality differentiation and fixed costs of trading to match all of the facts. Estimates based on these modifications imply that differences in goods' quality could be the proximate cause of about 25% of country differences in real income per worker.
Published: Hummels, David and Peter J. Klenow. "The Variety And Quality Of A Nation's Exports," American Economic Review, 2005, v95(2,May), 704-723.
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