Fantastic beasts are magical creatures that cannot be seen unless one looks for them with the eye of the wizard, but that still play a significant role in the world. The fantastic beasts we hunt and find in the present paper are welfare changes induced by resource shocks that are invisible in quantitative trade models with monopolistic competition and heterogeneous firms if one relies on the pervasive assumption of demand exhibiting constant elasticity of substitution. We argue that, for fantastic beasts to materialize, markups have to vary across firms and firm heterogeneity has to vary across sectors. This is shown both theoretically and empirically exploiting a panel of 76 countries and 17 manufacturing industries for the period 1995-2020.

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Gianmarco I. P. Ottaviano and Davide Suverato

12 April 2024     Paper Number CEPDP1989

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This CEP discussion paper is published under the centre's Trade programme.