Productivity and Firm Selection: Quantifying the 'New' Gains from Trade

Abstract

We discuss how standard computable equilibrium models of trade policy can be enriched with selection effects. This is achieved by estimating and simulating a partial equilibrium model that accounts for a number of real world effects of trade liberalization: richer availability of product varieties; tougher competition and weaker market power of firms; better exploitation of economies of scale; and, of course, efficiency gains via firms selection. The model is estimated on EU data and then simulated in counter-factual scenarios. Gains from trade are much larger in the presence of selection effects with substantial variability across countries and sectors.