Variety Gains and the Extensive Margin of Trade

Findings from the literature suggest that previous estimates of the variety gains from trade are too small because of the imprecise measurement of the imported variety set under the Armington assumption. In this contribution, I use results from the literature on multi-product firms to obtain variety gain estimates that account for the entry and exit of firms as well as for product turnover within firms and find that welfare gains increase by a factor of 2.5 compared to the baseline Armington product-country variety differentiation case. I furthermore modify the lambda ratios presented in Feenstra (1994) by assuming that all import variations are due to extensive margin adjustments. Under this extreme assumption, variety gains increase by a factor of six but remain modest in magnitude.