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GTAP Resource #6820

"A Computable General Equilibrium Theory of Heterogeneous Firms with Product Quality Differentiation"
by Jafari, Yaghoob, Helena Engemann and Thomas Heckelei

In the existing computable general equilibrium models, changes in trade flows are based on the assumption that the quality of the products shipped to each export destination and the perception of consumers in those markets toward product qualities remains unchanged. This is contrary to the recent literature emphasizing the supply-side aspects of quality differentiation, that is product quality across firms differ, and/or the demand side aspects of quality differentiation, that is the willingness of consumers across markets for product qualities offered by firms differs and it may vary. This study provides an extension to the formulation of international trade in the computable general equilibrium (CGE) models that rely on (MELITZ 2003) by allowing firms to produce distinct product qualites and to serve markets in which the willingness of consumers to pay for quality is sufficieictly high for their profitability. This extension is based on the theoratical studies that include firm product quality differentiation into the Melitz framework and studies that offer appraches to translate the theroratical frameworks of firm in international trade into a comutable setting accecible to CGE modellers. We first bring both supply and demand-side aspects of product quality into a unified general equilibrium framework defined at the firm level. In the unified framework, the quality of products of firms are determined based on their productvity, and the decision of firms to operate on each trade link depends on the willingness of consumers to pay for the prodcut quality that is in turn determined by the per capita income in each destination. Second, we translate the unified framework defined at the firm level to a computable settign that matches the relatively aggregate sectoral data and definitions of available data used by CGE models. Therefore, our proposed CGE framework enhances the accessibility of firm trade models with prodcut quality differnetiation to CGE modelers.

Resource Details (Export Citation) GTAP Keywords
Category: 2023 Conference Paper
Status: Not published
By/In: Presented during the 26th Annual Conference on Global Economic Analysis (Bordeaux, France)
Date: 2023
Version: 1
Created: Jafari, Y. (4/3/2023)
Updated: Jafari, Y. (4/3/2023)
Visits: 427
- Advances in quantitative methods
- New quantitative trade models

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