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Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms

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  • Balistreri, Edward J.
  • Rutherford, Thomas F.

Abstract

This chapter considers alternatives to the Armington formulation of international trade found in most computable general equilibrium (CGE) models. International trade structures consistent with the monopolistic competition models suggested by Krugman (1980) and Melitz (2003) are presented in a computational setting. The Melitz structure of heterogeneous firms is particularly appealing given its consistency with micro-level findings on firm sizes and export behavior. We broaden the accessibility of these advanced trade theories for CGE modelers, and strengthen the link between contemporary CGE analysis and the broader trade community. Small-scale examples of all three theories (Armington, Krugman and Melitz) are introduced under a unified treatment. This is helpful in translating the advanced theories into an environment that is more familiar to CGE modelers. It is also helpful in showing how the different approaches affect outcomes, in a relatively transparent setting. Moving to an applied setting, we offer our approach to calibration and computation of models that include the Melitz heterogeneous firms structure. Our applications include an analysis of economic integration and subglobal climate policy in a model calibrated to the Global Trade Analysis Project (GTAP) data. We do find that the heterogeneous firms structure matters for conclusions drawn from empirical CGE analysis. In our analysis of economic integration we find endogenous entry leading to important variety effects. We also find important productivity effects related to the competitive selection of more productive firms. In our examination of subglobal climate policy we see substantial trade diversion in the Melitz structure. This exacerbates the problem of carbon leakage and impacts the emissions yields from carbon-based tariffs.

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Bibliographic Info

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This chapter was published in:

  • Peter B. Dixon & Dale Jorgenson (ed.), 2012. "Handbook of Computable General Equilibrium Modeling," Handbook of Computable General Equilibrium Modeling, Elsevier, edition 1, volume 1, number 1.
    This item is provided by Elsevier in its series Handbook of Computable General Equilibrium Modeling with number v:1:y:2013:i:c:p:1513-1570.

    Handle: RePEc:eee:hacchp:v:1:y:2013:i:c:p:1513-1570

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    Web page: http://store.elsevier.com/Handbook-of-Computable-General-Equilibrium-Modeling/isbn-9780444536341/

    Related research

    Keywords: New trade theory; computable general equilibrium; intraindustry trade; trade policy; climate policy;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
    2. Bernard, Andrew B. & Bradford Jensen, J., 1999. "Exceptional exporter performance: cause, effect, or both?," Journal of International Economics, Elsevier, vol. 47(1), pages 1-25, February.
    3. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
    4. Edward J. Balistreri & Russell H. Hillberry, 2008. "The Gravity Model: An Illustration Of Structural Estimation As Calibration," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 511-527, October.
    5. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    6. Edward J. Balistreri & James R. Markusen, 2007. "Sub-national Differentiation and the Role of the Firm in Optimal International Pricing," NBER Working Papers 13130, National Bureau of Economic Research, Inc.
    7. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andres Rodriguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," American Economic Review, American Economic Association, vol. 98(2), pages 444-50, May.
    8. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
    9. Daniel Trefler, 2001. "The Long and Short of the Canada-U.S. Free Trade Agreement," NBER Working Papers 8293, National Bureau of Economic Research, Inc.
    10. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
    11. Baldwin, Richard & Forslid, Rikard, 2004. "Trade Liberalization with Heterogenous Firms," CEPR Discussion Papers 4635, C.E.P.R. Discussion Papers.
    12. Russell H. Hillberry & Edward J. Balistreri & Thomas F. Rutherford, 2007. "Structural Estimation and Solution of International Trade Models with Heterogeneous Firms," DEGIT Conference Papers c012_038, DEGIT, Dynamics, Economic Growth, and International Trade.
    13. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    14. Drusilla K. Brown & Alan V. Deardorff & Robert M. Stern, 1992. "A North American Free Trade Agreement: Analytical Issues and a Computational Assessment," The World Economy, Wiley Blackwell, vol. 15(1), pages 11-30, 01.
    15. Markusen, James R., 1990. "Derationalizing tariffs with specialized intermediate inputs and differentiated final goods," Journal of International Economics, Elsevier, vol. 28(3-4), pages 375-383, May.
    16. Peters, Glen P., 2008. "From production-based to consumption-based national emission inventories," Ecological Economics, Elsevier, vol. 65(1), pages 13-23, March.
    17. Aw, Bee Yan & Chen, Xiaomin & Roberts, Mark J., 2001. "Firm-level evidence on productivity differentials and turnover in Taiwanese manufacturing," Journal of Development Economics, Elsevier, vol. 66(1), pages 51-86, October.
    18. Edward J. Balistreri & Russell H. Hillberry & Thomas F. Rutherford, 2009. "Trade and Welfare: Does Industrial Organization Matter?," CER-ETH Economics working paper series 09/119, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    19. Eric J. Bartelsman & Mark Doms, 2000. "Understanding productivity: lessons from longitudinal microdata," Finance and Economics Discussion Series 2000-19, Board of Governors of the Federal Reserve System (U.S.).
    20. Linda Hunter & James R. Markusen & Thomas F. Rutherford, 1992. "US-Mexico Free Trade and the North American Auto Industry: Effects on the Spatial Organisation of Production of Finished Autos," The World Economy, Wiley Blackwell, vol. 15(1), pages 65-82, 01.
    21. Wyckoff, Andrew W. & Roop, Joseph M., 1994. "The embodiment of carbon in imports of manufactured products : Implications for international agreements on greenhouse gas emissions," Energy Policy, Elsevier, vol. 22(3), pages 187-194, March.
    22. Robert C. Feenstra, 2009. "Measuring the Gains from Trade under Monopolistic Competition," NBER Working Papers 15593, National Bureau of Economic Research, Inc.
    23. David Hummels & Peter J. Klenow, 2005. "The Variety and Quality of a Nation's Exports," American Economic Review, American Economic Association, vol. 95(3), pages 704-723, June.
    24. David Cox & Richard G. Harris, 1992. "North American Free Trade and its Implications for Canada: Results from a CGE Model of North American Trade," The World Economy, Wiley Blackwell, vol. 15(1), pages 31-44, 01.
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    Cited by:
    1. Robert C. Feenstra & Philip A. Luck & Maurice Obstfeld & Katheryn N. Russ, 2014. "In Search of the Armington Elasticity," NBER Working Papers 20063, National Bureau of Economic Research, Inc.
    2. Costinot, Arnaud & Rodriguez-Clare, Andres, 2013. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," CEPR Discussion Papers 9398, C.E.P.R. Discussion Papers.
    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. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2012. "Tariffs and welfare in new trade theory models," University of Tuebingen Working Papers in Economics and Finance 41, University of Tuebingen, Faculty of Economics and Social Sciences.
    5. 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".
    6. 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).

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