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GTAP Resource #4445

"Introducing Firm Heterogeneity into the GTAP Model with an Illustration in the Context of the Trans-Pacific Partnership Agreement "
by Akgul, Zeynep, Nelson B. Villoria and Thomas Hertel

Traditional computable general equilibrium models (CGE) with Armington specification (e.g. GTAP) do not capture trade expansion at the extensive margin which is at odds with the empirical trade literature. The firm heterogeneity trade model proposed in the pioneering work of Melitz (2003) combines the intensive margin with the extensive margin effects of trade liberalization capturing self-selection of firms into export markets based on their respective productivity levels. This paper documents an approach to implement monopolistic competition with firm heterogeneity into the GTAP model. The firm heterogeneity module incorporates new channels that are previously unexplored in the standard model such as the effect of new varieties (extensive margin), the effect of scale economies (changes in output per firm), and the effect of endogenous productivity.

We illustrate this framework with a stylized scenario of the Trans-Pacific partnership agreement in which we eliminate Japanese tariffs on the import of US manufacturing goods. This example demonstrates the importance of endogenous firm entry/exit and the role of firm reallocation within the manufacturing industry in determining aggregate productivity. We observe that aggregate productivity in the US manufacturing sector increases as a result of tariff elimination based on two factors. On the one hand less productive firms are forced to exit the industry which raises the contribution of the high productivity levels of the remaining firms on average. On the other hand, trade leads to higher export sales of more productive firms which induces a reallocation of market shares in favor of more productive firms so that they contribute more to average productivity. These preliminary results show that including firm-level heterogeneity into GTAP can improve the ability of the model to trace out the implications of regional trade agreements.

Resource Details (Export Citation) GTAP Keywords
Category: 2014 Conference Paper
Status: Published
By/In: Presented at the 17th Annual Conference on Global Economic Analysis, Dakar, Senegal
Date: 2014
Created: Akgul, Z. (4/15/2014)
Updated: Akgul, Z. (4/15/2014)
Visits: 2,939
- Multilateral trade negotiations

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