Explaining disaggregated trade data with ricardian trade model

Abstract

The aim of this thesis is to explain how disaggregated-product level trade data fits into Eaton and Kortum (2002) type Ricardian trade model. In their paper, Eaton and Kortum (2002) explain the effect of geographical barriers and technological differences on trade between countries using data at aggregate level. Their model with perfect competition and constant marginal costs actually implies that the countries who have the lowest cost in supplying a particular good to a particular destination should capture the entire demand for that good in that destination. However, this is not what is observed in disaggregated bilateral trade data even in the least aggregated level. In this thesis, we propose alternative explanations such as capacity constraints and increasing marginal costs to reconcile Eaton and Kortum (2002) setup with disaggregated bilateral trade data. Our aim is to investigate why one seller is not able to win the entire market. The results suggest that costs are not increasing with trade quantities thus constant marginal costs is still possible. To explain multiple sellers for each good and the fact that each exporter sells at a different unit price. It could be the case that exporters are bounded by capacity constraints for each good in a given market. We report relative productivities of exporters at each destination where we report to a destination with a low trade cost even low productive firms can compete but for destinations with a high trade costs only most productive firms export.