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Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms

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  • Balistreri, Edward J.
  • Rutherford, Thomas F.

Abstract

This chapter considers alternatives to the Armington formulation of international trade found in most computable general equilibrium (CGE) models. International trade structures consistent with the monopolistic competition models suggested by Krugman (1980) and Melitz (2003) are presented in a computational setting. The Melitz structure of heterogeneous firms is particularly appealing given its consistency with micro-level findings on firm sizes and export behavior. We broaden the accessibility of these advanced trade theories for CGE modelers, and strengthen the link between contemporary CGE analysis and the broader trade community. Small-scale examples of all three theories (Armington, Krugman and Melitz) are introduced under a unified treatment. This is helpful in translating the advanced theories into an environment that is more familiar to CGE modelers. It is also helpful in showing how the different approaches affect outcomes, in a relatively transparent setting. Moving to an applied setting, we offer our approach to calibration and computation of models that include the Melitz heterogeneous firms structure. Our applications include an analysis of economic integration and subglobal climate policy in a model calibrated to the Global Trade Analysis Project (GTAP) data. We do find that the heterogeneous firms structure matters for conclusions drawn from empirical CGE analysis. In our analysis of economic integration we find endogenous entry leading to important variety effects. We also find important productivity effects related to the competitive selection of more productive firms. In our examination of subglobal climate policy we see substantial trade diversion in the Melitz structure. This exacerbates the problem of carbon leakage and impacts the emissions yields from carbon-based tariffs.

Suggested Citation

  • Balistreri, Edward J. & Rutherford, Thomas F., 2013. "Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms," Handbook of Computable General Equilibrium Modeling, Elsevier.
  • Handle: RePEc:eee:hacchp:v:1:y:2013:i:c:p:1513-1570
    DOI: 10.1016/B978-0-444-59568-3.00023-7
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    References listed on IDEAS

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    Cited by:

    1. Ken Itakura & Kazuhiko Oyamada, 2015. "Examining Trade Response of Armington-Krugman-Melitz Encompassing Module in a CGE Model," EcoMod2015 8695, EcoMod.
    2. Jaime DE MELO & Julie REGOLO, 2013. "Labor Markets in Regional Trade Agreements: What Do We Know ?," Working Papers P69, FERDI.
    3. Zoryana Olekseyuk, 2015. "The EU-Ukraine Deep and Comprehensive Free Trade Agreement and the importance of FDI," EcoMod2015 8391, EcoMod.
    4. repec:eee:ecmode:v:66:y:2017:i:c:p:214-222 is not listed on IDEAS
    5. Zoryana Olekseyuk, 2016. "Modeling of FDI in business services: Additional effects in case of Ukraine's European integration," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 25(7), pages 1010-1043, October.
    6. Egger, Peter & Nigai, Sergey, 2015. "Structural Gravity with Dummies Only," CEPR Discussion Papers 10427, C.E.P.R. Discussion Papers.
    7. Kazuhiko Oyamada & Kaoru Nabeshima & Etsuyo Michida, 2015. "Analyses of EU RoHS/ELV Directives Based on an AGE Model with Melitz-type Trade Specification," EcoMod2015 8304, EcoMod.
    8. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, Elsevier.
    9. Omar O. Chisari & Sebastián J. Miller, 2014. "Does Firm Heterogeneity Impact the Effectiveness of Carbon Taxes? Experiments in Argentina and Mexico," IDB Publications (Working Papers) 86256, Inter-American Development Bank.
    10. 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.
    11. Nobuhiro Hosoe, 2016. "Impact of Brexit: Firm Exit and Loss of Variety," GRIPS Discussion Papers 16-12, National Graduate Institute for Policy Studies.
    12. Oyamada, Kazuhiko, 2013. "Parameterization of applied general equilibrium models with flexible trade specifications based on the Armington, Krugman, and Melitz models," IDE Discussion Papers 380, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    13. Nobuhiro Hosoe, 2017. "Impact of Border Barriers, Returning Migrants, and Trade Diversion in Brexit: Firm Exit and Loss of Variety," GRIPS Discussion Papers 17-04, National Graduate Institute for Policy Studies.
    14. Roberto Roson & Kazuhiko Oyamada, 2014. "Introducing Melitz-Style Firm Heterogeneity in CGE Models: Technical Aspects and Implications," Working Papers 2014:04, Department of Economics, University of Venice "Ca' Foscari".
    15. Feenstra, Robert & Luck, Philip & Obstfeld, Maurice & Russ, Katheryn N., 2014. "In Search of the Armington Elasticity," CEPR Discussion Papers 9951, C.E.P.R. Discussion Papers.
    16. Omar O. Chisari & Sebastián J. Miller, 2014. "Does Firm Heterogeneity Impact the Effectiveness of Carbon Taxes? Experiments in Argentina and Mexico," IDB Publications (Working Papers) 6606, Inter-American Development Bank.
    17. 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.
    18. Kazuhiko Oyamada, 2014. "Behavioral Characteristics of Applied General Equilibrium Models with Flexible Trade Specifications Based on the Armington, Krugman, and Melitz Models," EcoMod2014 6704, EcoMod.
    19. Oyamada, Kazuhiko, 2014. "Neutrality in the choice of number of firms or level of fixed costs in calibrating an Armington-Krugman-Melitz encompassing module for applied general equilibrium models," IDE Discussion Papers 465, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    20. Oyamada, Kazuhiko, 2015. "Behavioral characteristics of applied general equilibrium models with an Armington-Krugman-Melitz encompassing module," IDE Discussion Papers 525, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    21. Olekseyuk, Zoryana & Schürenberg-Frosch, Hannah, 2016. "Are Armington elasticities different across countries and sectors? A European study," Economic Modelling, Elsevier, vol. 55(C), pages 328-342.
    22. repec:eee:ecmode:v:69:y:2018:i:c:p:193-204 is not listed on IDEAS
    23. Baccianti, Claudio & Schenker, Oliver, 2015. "Report on the dynamic efficiency of trade-related climate policy instruments," ZEW Expertises, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research, number 148927.
    24. Oyamada, Kazuhiko, 2016. "Simulation analysis of the EU ELV/RoHS directives based on an applied general equilibrium model with Melitz-type trade specification," IDE Discussion Papers 587, Institute of Developing Economies, Japan External Trade Organization(JETRO).

    More about this item

    Keywords

    New trade theory; computable general equilibrium; intraindustry trade; trade policy; climate policy;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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