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GTAP-HET: Introducing Firm Heterogeneity into the GTAP Model

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  • Zeynep Akgul
  • Nelson B Villoria
  • Thomas W Hertel

Abstract

Computable General Equilibrium (CGE) models incorporating firm heterogeneity can overcome the shortcomings of traditional Armington-based models in explaining changes in productivity and variety in the wake of reduced trade costs. In this paper, we present a new modeling framework where the firm heterogeneity theory of Melitz is introduced into the Global Trade Analysis Project (GTAP) model and calibrated to the GTAP 8 Data Base. The new mechanisms in the model are demonstrated in a stylized scenario with 3 regions (USA, Japan and the Rest of the World) and 2 sectors (manufacturing and non-manufacturing) where the elimination of tariffs levied by Japan on the import of US manufacturing goods is examined. Results are compared with those under monopolistic competition motivated by Krugman and under perfect competition motivated by Armington. The firm heterogeneity model incorporates endogenous variety, scale, productivity, and fixed cost effects into welfare change in addition to the traditional allocative efficiency and terms of trade effects. We observe that these effects are significant sources of welfare change. GTAP-HET presents the first GTAP implementation of firm heterogeneity. It is a powerful tool for policy analysis with improved abilities in tracing out productivity changes and entry/exit of firms following trade liberalization scenarios.

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  • Zeynep Akgul & Nelson B Villoria & Thomas W Hertel, 2016. "GTAP-HET: Introducing Firm Heterogeneity into the GTAP Model," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 1(1), pages 111-180, June.
  • Handle: RePEc:gta:jnlgea:v:1:y:2016:i:1:p:111-180
    DOI: http://dx.doi.org/10.21642/JGEA.010102AF
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    1. Peter Dixon & Michael Jerie & Maureen Rimmer, 2016. "Modern Trade Theory for CGE Modelling: The Armington, Krugman and Melitz Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 1(1), pages 1-110, June.
    2. Yi, Chae-Deug, 2020. "The computable general equilibrium analysis of the reduction in tariffs and non-tariff measures within the Korea-Japan-European Union free trade agreement," Japan and the World Economy, Elsevier, vol. 56(C).
    3. Alessandro Antimiani & Luca Salvatici & Ilaria Fusacchia, 2018. "GTAP-VA: An Integrated Tool for Global Value Chain Analysis," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 3(2), pages 69-105, December.
    4. Kazuhiko Oyamada, 2017. "Behavioral Characteristics of Applied General Equilibrium Models with Variable Elasticity of Substitution between Varieties from Different Sources," EcoMod2017 10113, EcoMod.
    5. Wang, Xiaoxi & Dietrich, Jan P. & Lotze-Campen, Hermann & Biewald, Anne & Stevanović, Miodrag & Bodirsky, Benjamin L. & Brümmer, Bernhard & Popp, Alexander, 2020. "Beyond land-use intensity: Assessing future global crop productivity growth under different socioeconomic pathways," Technological Forecasting and Social Change, Elsevier, vol. 160(C).
    6. Hübler, Michael & Pothen, Frank, 2017. "Trade-induced productivity gains reduce incentives to impose strategic tariffs," Economic Modelling, Elsevier, vol. 61(C), pages 420-431.
    7. Nilsson, Lars, 2019. "Reflections on the economic modelling of free trade agreements," DG TRADE Chief Economist Notes 2019-2, Directorate General for Trade, European Commission.
    8. Ana Sanjuan Lopez & Marie-Luise Rau & Geert Woltjer, 2019. "Exploring alternative approaches to estimate the impact of non-tariff measures and further implementation in simulation models," JRC Research Reports JRC113883, Joint Research Centre (Seville site).
    9. Hosoe, Nobuhiro, 2018. "Impact of border barriers, returning migrants, and trade diversion in Brexit: Firm exit and loss of variety," Economic Modelling, Elsevier, vol. 69(C), pages 193-204.
    10. Peter Dixon & Michael Jerie & Maureen Rimmer, 2019. "Melitz in GTAP Made Easy: the A2M Conversion Method and Result Interpretation," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 4(1), pages 97-127, June.
    11. Niemi, Janne, 2018. "Short-run and long-run food import elasticities with persistent trading habits," Working Papers 111, VATT Institute for Economic Research.
    12. Frank van Tongeren & Robert Koopman & Stephen Karingi & John Reilly & Joseph Francois, 2021. "Back to the Future: A 25-Year Retrospective on GTAP and the Shaping of a New Agenda," World Scientific Book Chapters, in: Peter Dixon & Joseph Francois & Dominique van der Mensbrugghe (ed.), POLICY ANALYSIS AND MODELING OF THE GLOBAL ECONOMY A Festschrift Celebrating Thomas Hertel, chapter 3, pages 41-93, World Scientific Publishing Co. Pte. Ltd..
    13. Caitlyn Carrico, 2017. "An Enhanced Analytical Framework for Evaluating the Effects of Trade Costs along Global Value Chains," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 2(2), pages 43-111, December.
    14. Eddy Bekkers & Joseph Francois, 2018. "A Parsimonious Approach to Incorporate Firm Heterogeneity in CGE-Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 3(2), pages 1-68, December.
    15. Jafari, Yaghoob & Britz, Wolfgang, 2018. "Modelling heterogeneous firms and non-tariff measures in free trade agreements using Computable General Equilibrium," Economic Modelling, Elsevier, vol. 73(C), pages 279-294.
    16. Wolfgang Britz & Dominique van der Mensbrugghe, 2018. "CGEBox: A Flexible, Modular and Extendable Framework for CGE Analysis in GAMS," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 3(2), pages 106-177, December.
    17. Yaghoob Jafari & Wolfgang Britz, 2020. "Brexit: an economy-wide impact assessment on trade, immigration, and foreign direct investment," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 17-52, February.
    18. Erwin Corong & Thomas Hertel & Robert McDougall & Marinos Tsigas & Dominique van der Mensbrugghe, 2017. "The Standard GTAP Model, version 7," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 2(1), pages 1-119, June.
    19. Wolfgang Britz & Roberto Roson, 2018. "Exploring Long Run Structural Change with a Dynamic General Equilibrium Model," Working Papers 2018: 12, Department of Economics, University of Venice "Ca' Foscari".
    20. Jafari, Yaghoob & Britz, Wolfgang, 2016. "Prospects of the Food Processing Sector under Tariff and Non-Tariff Measures Liberalization in the Transatlantic Trade and Investment Partnership," Discussion Papers 250254, University of Bonn, Institute for Food and Resource Economics.
    21. Baniya, Suprabha & Taniguchi, Kiyoshi, 2022. "Trade Effects of Transportation Infrastructure among CAREC Countries," ADB Economics Working Paper Series 669, Asian Development Bank.
    22. Terrie Walmsley & Peter Minor, 2020. "Demand shifts and willingness to pay in applied trade models," The World Economy, Wiley Blackwell, vol. 43(6), pages 1499-1520, June.
    23. Balistreri, Edward J. & Tarr, David G., 2020. "Comparison of deep integration in the Melitz, Krugman and Armington models: The case of The Philippines in RCEP," Economic Modelling, Elsevier, vol. 85(C), pages 255-271.
    24. Wolfgang Britz & Hasan Dudu & Ilaria Fusacchia & Yaghoob Jafari & Roberto Roson & Luca Salvatici & Martina Sartori, 2019. "Economy-wide analysis of food waste reductions and related costs," JRC Research Reports JRC113395, Joint Research Centre (Seville site).

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