Intermediate Inputs, Firm Heterogeneity and Gains From International Trade

Abstract

This thesis studies the role of intermediate input goods in explaining international trade patterns and determining gains from trade based on heterogenous firms models. The first chapter provides a preview and literature review. In the second chapter, I extend two workhorse heterogenous firms trade models to incorporate intermediate inputs and value-added productivity differences across firms. This set-up yields a positive relationship between the international trade elasticity and the share of intermediate goods used in production. I test this relationship using trade and input-output data from the 1980s and 2000s, finding evidence which is consistent with the model's predictions. I then quantify the gains from trade based on this modified framework, finding values which are significantly higher than those from the standard models. In the third chapter, I extend a standard heterogeneous firms trade model by including sector-level productivity differences across production stages (intermediate and final). I then use input-output data from 2005 to explore the degree of cross-stage production specialization across countries. Based on the model and data, I find that the welfare gains from this margin are, on average, modest. For emerging economies, however, the gains are significantly higher than the average. In the fourth chapter, I explore the implications of the rising share of non-tradable services and rising share of intermediate inputs on the gains from trade based on a standard heterogeneous firms trade model. I use data from 1995 and 2011 to document and quantify these trends. Based on the model and data, I find that the negative impact of the rise of services and the positive impact of intermediate inputs growth roughly offset one another. I emphasize the role of intermediate inputs sectoral linkages in moderating these trends.