A correct parametric approximation of the productivity distribution is essential to calculate
Gains From Trade (GFT) in heterogeneous firms models. This paper argues that heterogeneity
in productivity is best captured by Finite Mixture Models (FMMs). FMMs build on the existence
of unobserved subpopulations in the data. As such, they are generally consistent with
models of firm dynamics differing between groups of firms and allow for a very flexible distribution
fit. We find FMMs to increase this fit by more than 70% compared to currently considered
distributions. A GFT exercise with Portuguese data reveals that only FMMs approximate the
‘true gains’ reasonably well
