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Heterogeneous Firms and Trade: Testable and Untestable Properties of the Melitz Model

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Richard Baldwin

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Abstract

This paper sets out a basic heterogeneous-firms trade model that is closely akin to Melitz (2003). The positive and normative properties of the model are studied in a manner intended to highlight the core economic logic of the model. The paper also studies the impact of greater openness at the firm-level and aggregate level, focusing on changes in the number and type of firms, trade volumes and prices, and productivity effects. The normative effects of liberalisation are also studied and here the paper focuses on aggregate gains from trade, and income redistribution effects, showing inter alia that the model is marked by a Stolper-Samuelson like effect. A number of empirically testable hypotheses are also developed. These concern the impact of greater openness on the firm-level trade pattern, the variance of unit-prices, the stock market valuation of firms according to size, and the lobbying behaviour by size.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11471.

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Date of creation: Jul 2005
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Handle: RePEc:nbr:nberwo:11471

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Find related papers by JEL classification:
F1 - International Economics - - Trade
F2 - International Economics - - International Factor Movements and International Business
F3 - International Economics - - International Finance

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  1. Wolfgang Keller, 2004. "International Technology Diffusion," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 752-782, September. [Downloadable!] (restricted)
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  2. Andrew B Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and productivity in international trade," Working Papers 00-08, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  3. Sébastien Jean, 2002. "International Trade and Firms' Heterogeneity under Monopolistic Competition," Open Economies Review, Springer, vol. 13(3), pages 291-311, July. [Downloadable!] (restricted)
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  4. Montagna, Catia, 2001. "Efficiency Gaps, Love of Variety and International Trade," Economica, London School of Economics and Political Science, vol. 68(269), pages 27-44, February. [Downloadable!] (restricted)
  5. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
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  6. Andrew Bernard & Stephen Redding & Peter Schott, 2004. "Comparative advantage and heterogeneous firms," IFS Working Papers W04/24, Institute for Fiscal Studies. [Downloadable!]
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  7. Bee Yan Aw & Sukkyun Chung & Mark J. Roberts, 1998. "Productivity and the Decision to Export: Micro Evidence from Taiwan and South Korea," NBER Working Papers 6558, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November. [Downloadable!] (restricted)
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  9. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March. [Downloadable!]
  10. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Blackwell Publishing, vol. 75(1), pages 295-316, 01. [Downloadable!] (restricted)
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  11. Feenstra, Robert & Rose, Andrew K, 1997. "Putting Things in Order: Patterns of Trade Dynamics and Macroeconomics," CEPR Discussion Papers 1629, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Wang, Z.K. & Winters, L.A., 1992. "The Trading Potential of Eastern Europe," Discussion Papers 92-21, Department of Economics, University of Birmingham.
  13. Rivera-Batiz, Luis A. & Romer, Paul M., 1991. "International trade with endogenous technological change," European Economic Review, Elsevier, vol. 35(4), pages 971-1001, May. [Downloadable!] (restricted)
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