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Armington Meets Melitz: Introducing Firm Heterogeneity in a Global CGE Model of Trade

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  • Zhai, Fan

    ()
    (Asian Development Bank Institute)

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Abstract

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 that obtained from the standard Armington CGE model. Sensitivity analysis 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.

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Bibliographic Info

Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 23 (2008)
Issue (Month): ()
Pages: 575-604

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Handle: RePEc:ris:integr:0446

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Web page: http://econo.sejong.ac.kr/
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Keywords: firm heterogeneity; CGE; trade liberalization;

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Cited by:
  1. Zhai, Fan, 2010. "The Benefits of Regional Infrastructure Investment in Asia: A Quantitative Exploration," ADBI Working Papers 223, Asian Development Bank Institute.
  2. Xiang, Tao & Huang, Jikun & Kancs, d'Artis & Swinnen, Johan F.M., 2009. "Standards Driven Rural Development: A General Equilibrium Model with Market Imperfections," 2009 Conference, August 16-22, 2009, Beijing, China 51476, International Association of Agricultural Economists.
  3. Oyamada, Kazuhiko, 2013. "Parameterization of applied general equilibrium models with flexible trade specifications based on the Armington, Krugman, and Melitz models," IDE Discussion Papers 380, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  4. Peter A. Petri & Michael G. Plummer & Fan Zhai, 2010. "The Economics of the ASEAN Economic Community," Working Papers 13, Brandeis University, Department of Economics and International Businesss School.
  5. Kawai, Masahiro & Zhai, Fan, 2009. "China-Japan-United States integration amid global rebalancing: A computable general equilibrium analysis," Journal of Asian Economics, Elsevier, vol. 20(6), pages 688-699, November.
  6. Roberto Roson & Kazuhiko Oyamada, 2014. "Introducing Melitz-Style Firm Heterogeneity in CGE Models: Technical Aspects and Implications," Working Papers 2014:04, Department of Economics, University of Venice "Ca' Foscari".
  7. Hertel, Thomas, 2013. "Global Applied General Equilibrium Analysis Using the Global Trade Analysis Project Framework," Handbook of Computable General Equilibrium Modeling, Elsevier.
  8. Fugazza, Marco & Maur, Jean-Christophe, 2008. "Non-tariff barriers in CGE models: How useful for policy?," Journal of Policy Modeling, Elsevier, vol. 30(3), pages 475-490.
  9. KAWASAKI Kenichi, 2014. "The Relative Significance of EPAs in Asia-Pacific," Discussion papers 14009, Research Institute of Economy, Trade and Industry (RIETI).
  10. Oyamada, Kazuhiko, 2014. "Neutrality in the choice of number of firms or level of fixed costs in calibrating an Armington-Krugman-Melitz encompassing module for applied general equilibrium models," IDE Discussion Papers 465, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  11. Petri, Peter A. & Zhai, Fan, 2013. "Navigating a Changing World Economy: ASEAN, the People’s Republic of China, and India," ADBI Working Papers 404, Asian Development Bank Institute.
  12. María C. Latorre, 2009. "The economic analysis of multinationals and foreign direct investment: a review," Hacienda Pública Española, IEF, vol. 191(4), pages 97-126, December.
  13. Deng, Ziliang & Falvey, Rod & Blake, Adam, 2012. "Trading market access for technology? Tax incentives, foreign direct investment and productivity spillovers in China," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 675-690.

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