Associate Professor, Faculty of Economics and Business Admin Fukushima University
Associate Professor, Policy Design Lab, Tohoku University

How different are the impacts of trade cost on trade flows between intermediate goods and final goods? How large are the welfare gains from trade for intermediate goods relative to final goods? To address these questions, we develop a heterogeneous firm model in which selection into exporting and importing play a key role in industry productivity of vertically-related sectors. We show that the impact of trade cost on trade flows is greater for intermediate goods than for final goods, due to an extra adjustment through the extensive margin. We also find that the impact of trade cost on welfare is greater for intermediate goods than for final goods if and only if the domestic input share is smaller than the domestic output share.