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Computing General Equilibrium Theories of Monopolistic Competition and Heterogeneous Firms

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

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.

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This chapter was published in:
  • Peter B. Dixon & Dale Jorgenson (ed.), 2012. "Handbook of Computable General Equilibrium Modeling," Handbook of Computable General Equilibrium Modeling, Elsevier, edition 1, volume 1, number 1, 05.
  • This item is provided by Elsevier in its series Handbook of Computable General Equilibrium Modeling with number v:1:y:2013:i:c:p:1513-1570.
    Handle: RePEc:eee:hacchp:v:1:y:2013:i:c:p:1513-1570
    Contact details of provider: Web page: http://store.elsevier.com/Handbook-of-Computable-General-Equilibrium-Modeling/isbn-9780444536341/

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    9. Aw, Bee Yan & Chen, Xiaomin & Roberts, Mark J., 2001. "Firm-level evidence on productivity differentials and turnover in Taiwanese manufacturing," Journal of Development Economics, Elsevier, vol. 66(1), pages 51-86, October.
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    12. Linda Hunter & James R. Markusen & Thomas F. Rutherford, 1992. "US-Mexico Free Trade and the North American Auto Industry: Effects on the Spatial Organisation of Production of Finished Autos," The World Economy, Wiley Blackwell, vol. 15(1), pages 65-82, 01.
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    16. Edward J. Balistreri & Russell H. Hillberry & Thomas F. Rutherford, 2008. "Structural Estimation and Solution of International Trade Models with Heterogeneous Firms," Department of Economics - Working Papers Series 1056, The University of Melbourne.
    17. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    18. Bernard, Andrew B. & Bradford Jensen, J., 1999. "Exceptional exporter performance: cause, effect, or both?," Journal of International Economics, Elsevier, vol. 47(1), pages 1-25, February.
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    21. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
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    25. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2010. "Trade and welfare: Does industrial organization matter?," Economics Letters, Elsevier, vol. 109(2), pages 85-87, November.
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