Abstract Gains from Trade Liberalization with Flexible Extensive Margin Adjustment

We propose a new sucient statistic to measure the ex-post welfare gains from trade in CES models featuring any productivity distribution or pattern of selection into production and exporting. Our statistic is based on a single data moment, the change in the market share of continuing domestic producers, and a single structural parameter, the elasticity of substitution between products. We apply our statistic to measure Canada's gains from the Canada-US Free Trade Agreement using data on observed rm selection and simulated rm selection in a calibrated model with a exible extensive margin. We nd that welfare gains are substantially smaller than implied by welfare formulas that assume that the extensive margin behaves according to a standard Melitz-Pareto model with iso-elastic import demand.

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