Globalization and the Gains from Variety The Case of a Small Open Economy

This paper proposes lower and upper bounds for the gains from variety as derived by Broda and Weinstein (2006). Using these bounds, it is shown that for a small open economy like Switzerland, the gains from variety can amount to over 10 % of the GDP. As a second contribution, the gains from variety are attributed to countries of origin and product categories. Third, the gains from variety of a small open economy are compared to those of a large economy with a large domestic sector like the US. The import price index bias as derived by Feenstra (1994a) is lower in small open economies. 50 % to 95 % of this difference is due to the lower growth in imported variety. The rest is caused by the higher elasticities of substitution of import goods in the small open economy. Nonetheless, the gains from variety may be higher in the small open economy because the higher import share magnifies the price index bias relative to the large economy. (JEL F12, F14)