The Variety and Quality of a Nation's Exports

The Variety and Quality of a Nation's Exports

JUNE 2005 | David Hummels and Peter J. Klenow
The paper examines how larger economies export more in absolute terms than smaller ones, focusing on the extensive, intensive, and quality margins of trade. Using data on exports from 126 countries to 59 importers in 5,000 product categories, the authors find that the extensive margin accounts for about 60% of the greater exports of larger economies. Within categories, richer countries export higher quantities at modestly higher prices. The study compares these findings to trade models, finding that models with Armington national product differentiation incorrectly predict lower prices for larger economies, while models with Krugman firm-level product differentiation feature a prominent extensive margin but overpredict the rate at which variety responds to exporter size. Models with quality differentiation can match price facts, and models with fixed costs of exporting to a given market may explain why larger economies export a given product to more countries. The paper also discusses how trade theories differ in their predictions about how larger economies export more. Armington models emphasize the intensive margin, Krugman models emphasize the extensive margin, and quality differentiation models focus on higher-quality goods. The findings suggest that the extensive margin is more significant for larger economies, and that lower export prices are not necessarily a consequence of size. The study also finds that larger economies export more varieties to more countries, and that the quality margin is important for explaining export prices. The paper uses detailed data to decompose a nation's exports into contributions from the extensive, intensive, and quality margins. It finds that the extensive margin accounts for about 60% of the greater exports of larger economies, while the intensive margin is dominated by higher quantities of each good rather than higher unit prices. Richer countries export higher quantities of each good at modestly higher prices, consistent with higher quality. Countries with more workers export higher quantities of each good, but not at higher prices. These patterns hold for both the U.N. data and U.S. data. The paper also discusses the implications of these findings for trade theory and policy. It suggests that the extensive margin is more important for larger economies, and that the quality margin is important for explaining export prices. The study also finds that the extensive margin is more prominent for richer economies than for economies with more workers. The paper concludes that the findings have important implications for understanding trade and economic development.The paper examines how larger economies export more in absolute terms than smaller ones, focusing on the extensive, intensive, and quality margins of trade. Using data on exports from 126 countries to 59 importers in 5,000 product categories, the authors find that the extensive margin accounts for about 60% of the greater exports of larger economies. Within categories, richer countries export higher quantities at modestly higher prices. The study compares these findings to trade models, finding that models with Armington national product differentiation incorrectly predict lower prices for larger economies, while models with Krugman firm-level product differentiation feature a prominent extensive margin but overpredict the rate at which variety responds to exporter size. Models with quality differentiation can match price facts, and models with fixed costs of exporting to a given market may explain why larger economies export a given product to more countries. The paper also discusses how trade theories differ in their predictions about how larger economies export more. Armington models emphasize the intensive margin, Krugman models emphasize the extensive margin, and quality differentiation models focus on higher-quality goods. The findings suggest that the extensive margin is more significant for larger economies, and that lower export prices are not necessarily a consequence of size. The study also finds that larger economies export more varieties to more countries, and that the quality margin is important for explaining export prices. The paper uses detailed data to decompose a nation's exports into contributions from the extensive, intensive, and quality margins. It finds that the extensive margin accounts for about 60% of the greater exports of larger economies, while the intensive margin is dominated by higher quantities of each good rather than higher unit prices. Richer countries export higher quantities of each good at modestly higher prices, consistent with higher quality. Countries with more workers export higher quantities of each good, but not at higher prices. These patterns hold for both the U.N. data and U.S. data. The paper also discusses the implications of these findings for trade theory and policy. It suggests that the extensive margin is more important for larger economies, and that the quality margin is important for explaining export prices. The study also finds that the extensive margin is more prominent for richer economies than for economies with more workers. The paper concludes that the findings have important implications for understanding trade and economic development.
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