Import Prices, Variety and the Extensive Margin of Trade
This paper studies the aggregate price effect of newly imported varieties and compares it in a sample of countries. The method allows to quantify the measurement bias in import price indices that take as given the basket of imported varieties and neglect the aggregate effect of increased diversity. Applying it to the BACI database describing bilateral trade flows at the world level, we are able to compare the aggregate price impact of the extensive margin of trade among 28 countries. Our results suggest that, in the 1994-2003 period, neglecting newly imported varieties leads to overestimate in the import price level by 0.2% a year, on average. The magnitude of this effect however strongly varies across countries, this overestimation being especially strong in some emerging countries like India, Indonesia or Brazil.
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