Quantifying a vertical differentiation trade model

Abstract

We build a trade model that simultaneously embeds vertical product differentiation, within-country heterogenous income, heterogeneous goods, and many countries. Under some specification of costs and preferences, we can establish the existence of the general equilibrium and obtain a very tractable quantification model. We estimate all the model parameters applying the model properties on OECD countries. We finally quantify the effect of trade costs and economic shocks -like Brexit- on each country's share of high quality goods.