An Asymmetric Melitz Model of Trade and Growth

To examine the effects of unilateral trade liberalization on growth and welfare of the liberalizing and partner countries through intraindustry reallocations, we formulate an asymmetric two-country Melitz model of trade and endogenous growth based on capital accumulation. We obtain two general results analytically. First, each country's mass of exported varieties, revenue share of exported varieties, and growth rate increase if and only if its domestic productivity cutoff increases. Second, compared with the old balanced growth path, a permanent fall in any import trade cost raises the growth rates of all countries for all periods, and welfare of all countries.