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GTAP Resource #2307

"Armington Meets Melitz: Introducing Firm Heterogeneity in Global CGE Model of Trade"
by Zhai, Fan

Traditional CGE models with Armington assumption fail to capture the extensive margin of trade, thereby underestimate the trade and welfare effects of trade opening. To address this problem, this paper introduces the Melitz (2003) theoretical framework with firm heterogeneity and fixed exporting costs into a global CGE model. Some illustrative simulations show that the introduction of firm heterogeneity improves the ability of CGE model to capture the trade expansion and welfare effects of trade liberalization. Under the case of global manufacturing tariff cut, the estimated gains in welfare and exports are more than double of that obtained from standard Armington CGE model. Sensitivity analysis also indicates that model results are sensitive to the shape parameters of firm productivity distribution, suggesting the need of further empirical work to estimate the degree of firm heterogeneity.

Resource Details (Export Citation) GTAP Keywords
Category: 2007 Conference Paper
Status: Published
By/In: Presented at the 10th Annual Conference on Global Economic Analysis, Purdue University, USA; Journal of Economic Integration Vol. 23. No. 3
Date: 2007
Created: Zhai, F. (4/9/2007)
Updated: Zhai, F. (4/9/2007)
Visits: 4,148
- Calibration and parameter estimation

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