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8 - Chaney_model_Chaney_slides - ECON 357 Lecture 3 the...

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ECON 357 Lecture 3: the extensive margin of trade Thomas Chaney University of Chicago Thomas Chaney (University of Chicago) ECON 357 1 / 17
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Target of the paper Explain the observed role of the extensive margin of trade. Determin in such a model what parameters govern the elasticity of trade flows with respect to trade barriers. Thomas Chaney (University of Chicago) ECON 357 2 / 17
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New assumptions (versus Melitz) Many asymmetric countries with asymmetric trade barriers. No free entry: number of firms directly proportional to country size (can be relaxed). Pareto distributed productivity shocks (delivers closed form solutions). 1 extra numéraire sector as in Helpman-Krugman pins down relative wages (can be relaxed). Thomas Chaney (University of Chicago) ECON 357 3 / 17
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Set-up CES/Cobb-Douglas preferences, U q μ o ˆ q ( ω ) σ 1 σ d ω σ σ 1 ( 1 μ ) N asymmetric countries: sizes ( L i ) N i = 1 , trade barriers, ( τ ij , f ij ) N i , j = 1 . Thomas Chaney (University of Chicago) ECON 357 4 / 17
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Productivity distribution and entry Pareto distribution for productivities ϕ [ 1 , + ) , P ( ϕ > Φ ) = Φ θ with θ > σ 1 . Note: Pareto distributions are invariant to truncation, P ( ϕ > Φ | ϕ > ϕ ) = Φ ϕ θ = P ( ϕ > Φ ) ϕ ∗− θ In country n , L n potential entrants. Thomas Chaney (University of Chicago) ECON 357 5 / 17
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Ownership structure Without free entry, ownership structure matters. Aggregate world profits ( Π ) equally distributed across workers.
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