The Gains from Input Trade in Firm-Based Models of Importing

Abstract:
Trade in intermediate inputs allows firms to reduce their costs of production by using better, cheaper, or novel inputs from abroad. The extent to which firms participate in foreign input markets, however, varies substantially. We show that accounting for this heterogeneity in import behavior is important to quantify the effect of input trade on consumer prices. We provide a theoretical result that holds in a wide class of models of importing: the firm-level data on value added and domestic expenditure shares in material spending is sufficient to compute the change in consumer prices relative to input autarky. In an application to French data, we find that consumer prices of manufacturing products would be 27% higher in the absence of input trade. Relying on aggregate data leads to substantially biased results. We then extend the analysis to study counterfactuals other than autarky and the measurement of welfare. We find that the observable micro data on value added and domestic shares contains crucial information about the effects of the shocks.