Globalization and the Gains From Variety

Abstract

Since the seminal work of Krugman (1979), product variety has played a central role in models of trade and growth. In spite of the general use of love-of-variety models, there has been no systematic study of how the import of new varieties has contributed to national welfare gains in the United States. In this paper we show that the unmeasured growth in product variety from US imports has been an important source of gains from trade over the last three decades (1972-2001). Using extremely disaggregated data, we show that the number of imported product varieties has increased by a factor of four. We also estimate the elasticities of substitution for each available category at the same level of aggregation, and describe their behavior across time and SITC-5 industries. Using these estimates we develop an exact price index and find that the upward bias in the conventional import price index is approximately 1.2 percent per year. The magnitude of this bias suggests that the welfare gains from variety growth in imports alone are 2.8 percent of GDP.

Private provision of public good and immiserizing growth

“…So our choice of ρ is taken from the standard macro literature which predicts the average real return to equity to be about 6.5 % (see King et al 1988). The elasticity of substitution parameter, θ , is taken from trade literature that predicts its value to be anything between 0.17 to 0.95 (see Broda and Weinstein 2006). Remaining parameters (σ , β and n(0)) are treated as free and their values are taken accordingly so that growth rate becomes positive at L = 100.…”

U.S. import and export elasticities: a panel data approach

“…As a result, there will be some observations missing from our dataset, as we do not know the prices of goods for which the quantity imported is zero. Feenstra (1994) and Broda and Weinstein (2006) were very sensitive to the effect of changing varieties of imports in empirical work on trade flows. In particular, following Krugman (1979), they noted that increasing the number of varieties of a good imported into a country can have beneficial effects on welfare independent of the aggregate price and quantity of the goods.…”

“…Also, grounding the estimation in a GDP function approach does not allow us to assess the impact of variables that do not appear in the GDP function (such as foreign prices or exchange rates) on international trade flows. Broda and Weinstein (2006) also create their own set of import demand elasticities in the context of an effort to assess the impact of an increase in the variety of goods due to international trade on national welfare. Their approach shares one major characteristic with this article-they explicitly consider the possibility that imports of goods from different countries may be imperfect substitutes for each other as well as domestically produced goods.…”

Elasticity of substitution and anti-dumping decisions

“…Section 3 provides information on the data. In the estimations we combine data on anti-dumping measures from 19 countries from Bown (2010) with data on the elasticity of substitution from Broda and Weinstein (2006). Section 4 outlines the empirical model.…”