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Is Foreign Technological Advance Harmful in the Melitz Model?

Author

Listed:
  • Ehsan U. Choudhri

    () (Carleton University)

  • Antonio Marasco

    (Lahore University of Management Sciences)

Abstract

Abstract Foreign technological advance unambiguously reduces home welfare in a popular variant of the Melitz (Econometrica 71(6):1695–1725, 2003) model that assumes the presence of a costlessly traded homogeneous (outside) good (Demidova in Int Econ Rev 49(4):1437–1462, 2008). The present paper shows that this result is sensitive to the presence of the outside good and is, in fact, reversed in its absence: foreign technological advance always improves home welfare in the Melitz model without the outside good. Improvement in home welfare occurs via changes in the numbers and prices of domestic and imported varieties. For quantitative analysis of welfare effects, we calibrate an international trade model for the United States and its major trading partners. US is found to gain less from foreign technological improvements than its trading partners from US improvements. In either case, the magnitude of gains is modest.

Suggested Citation

  • Ehsan U. Choudhri & Antonio Marasco, 2017. "Is Foreign Technological Advance Harmful in the Melitz Model?," Open Economies Review, Springer, vol. 28(1), pages 149-166, February.
  • Handle: RePEc:kap:openec:v:28:y:2017:i:1:d:10.1007_s11079-016-9417-9
    DOI: 10.1007/s11079-016-9417-9
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    More about this item

    Keywords

    Melitz model; Heterogeneous firms; Technological change; Outside good;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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