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The Simple Analytics of the Melitz Model in a Small Open Economy

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  • Svetlana Demidova
  • Andrés Rodríguez-Clarez

Abstract

In this paper we present a version of the Melitz (2003) model for the case of a small economy and summarize its key relationships with the aid of a simple figure. We then use this figure to provide an intuitive analysis of the implications of asymmetric changes in trade barriers and show that a decline in import costs always benefits the liberalizing country. This stands in contrast to variants of the Melitz model with a freely traded (outside) sector, such as Demidova (2008) and Melitz and Ottaviano (2008), where the country that reduces importing trade costs experiences a decline in welfare.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17521.

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Date of creation: Oct 2011
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Publication status: published as “The Simple Analytics of the Melitz Model in a Small Economy” (with Andrés Rodríguez-Clare), Journal of International Economics, July 2013, 90(2), pp. 266-272
Handle: RePEc:nbr:nberwo:17521

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  1. Baldwin, Richard & Forslid, Rikard, 2004. "Trade Liberalization with Heterogenous Firms," CEPR Discussion Papers 4635, C.E.P.R. Discussion Papers.
  2. Baldwin, Richard & Okubo, Toshihiro, 2009. "Tax reform, delocation and heterogeneous firms," CEPR Discussion Papers 7340, C.E.P.R. Discussion Papers.
  3. Chor, Davin, 2009. "Subsidies for FDI: Implications from a model with heterogeneous firms," Journal of International Economics, Elsevier, vol. 78(1), pages 113-125, June.
  4. Svetlana Demidova, 2008. "Productivity Improvements And Falling Trade Costs: Boon Or Bane?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1437-1462, November.
  5. Grossman, Gene M. & Helpman, Elhanan & Szeidl, Adam, 2006. "Optimal integration strategies for the multinational firm," Journal of International Economics, Elsevier, vol. 70(1), pages 216-238, September.
  6. Demidova, Svetlana & Rodríguez-Clare, Andrés, 2009. "Trade policy under firm-level heterogeneity in a small economy," Journal of International Economics, Elsevier, vol. 78(1), pages 100-112, June.
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Cited by:
  1. Paz, Lourenco, 2012. "The impacts of trade liberalization on informal labor markets: an evaluation of the Brazilian case," MPRA Paper 38858, University Library of Munich, Germany.
  2. Marc J. Melitz & Stephen J. Redding, 2012. "Heterogeneous Firms and Trade," CEP Discussion Papers dp1183, Centre for Economic Performance, LSE.
  3. Benedikt Heid & Mario Larch & Alejandro Riaño, 2011. "Maquiladoras and Informality: A Mixed Blessing," CESifo Working Paper Series 3689, CESifo Group Munich.
  4. Felbermayr, Gabriel & Jung, Benjamin, 2012. "Unilateral trade liberalization in the Melitz model: A note," University of Tuebingen Working Papers in Economics and Finance 30, University of Tuebingen, Faculty of Economics and Social Sciences.
  5. 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.
  6. Gabriel J. Felbermayr & Benjamin Jung, 2011. "Home Market Effects and the Single-Sector Melitz Model," CESifo Working Paper Series 3695, CESifo Group Munich.
  7. Felbermayr, Gabriel & Jung, Benjamin, 2012. "The home market effect, regional inequality, and intra-industry reallocations," University of Tuebingen Working Papers in Economics and Finance 33, University of Tuebingen, Faculty of Economics and Social Sciences.

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