Working Paper No. 10-14

The Effects of Trade Liberalization on the Extensive and Intensive Margins of Trade in Developing Countries
Ha Nguyen
November 2010

ABSTRACT

This study examines the effects of trade liberalization on the extensive and intensive margins of import and export in developing countries. The study use the duties and the trade liberalization dummy variable (the year which countries have significant reforms in trade policies) to represent trade liberalization. As a result, the study found that the trade liberalization has a significant impact on the extensive and intensive margins of trade in developing countries. These results are consistent with the implications of the heterogeneous firm model: when trade barriers vary, not only does the intensive margin, but the extensive margin varies as well. This implies that the welfare loss of countries in reality with the existence of trade barriers is larger than the deadweight loss which we usually mention. I use the import and export demand functions and the method to measure the extensive and intensive margins of Hummels and Klenow (2002) to study the above issues.

JEL classification: F49
Keywords: Trade liberalization, extensive margin, intensive margin, Import and export demand functions, dynamic panel regression

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