We propose a sufficient statistics approach to measuring Ricardian comparative advantage in a quantitative trade model featuring cross-country differences in productivity, factor prices, market size, as well as monopolistic competition, endogenous markups, and firm heterogeneity. The model’s micro-foundations do not necessarily imply that the relevant data for the proposed sufficient statistics must include micro information, but its micro-structure is needed to understand how only macro information can be used instead. Applying the approach to Chinese microdata and cross-country macrodata, we show that imperfect competition with endogenous markups and firm heterogeneity have far-reaching implications for correctly measuring Ricardian comparative advantage.

We study the role of firm heterogeneity and imperfect competition for global production networks and the gains from trade. We develop a quantifiable trade model with two-sided firm heterogeneity, matching frictions, and oligopolistic competition upstream. More productive buyers endogenously match with more suppliers, thereby inducing tougher competition among them to enjoy lower input costs and superior performance. Transaction-level customs data confirms that downstream French and Chilean firms import higher values and quantities at lower prices as upstream Chinese markets become more competitive over time, with stronger responses by larger firms. Moreover, suppliers charge more diversified buyers lower mark-ups. Counterfactual analysis indicates that entry upstream benefits high-productivity buyers, while lower matching or trade costs benefit all buyers, with the biggest boost to mid-productivity buyers. All three shocks generate sizeable welfare gains, especially under package reforms. Global production networks thus mediate bigger effects and cross-border spillovers from industrial and trade policies.