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Behavioral characteristics of applied general equilibrium models with variable elasticity of substitution between varieties from different sources

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  • Oyamada, Kazuhiko

Abstract

This study explores the behavioral characteristics of the Melitz-type heterogeneous and the Krugman-type homogeneous firm models that endogenize substitution elasticity as an increasing function of the total number of varieties that are available in each destination country/region. Using a case the United States (US) liberalizes imports of manufactured products from China as an example, simulation experiments with a three-region, three-sector applied general equilibrium model of global trade revealed that economic agents comply with more inefficient circumstances when the importer's preference for variety intensifies. Whereas, a more efficient environment enables countries, including those excluded from a free trade agreement, to receive welfare gains when the influence of the total number of varieties to the substitution elasticity becomes strong.

Suggested Citation

  • Oyamada, Kazuhiko, 2019. "Behavioral characteristics of applied general equilibrium models with variable elasticity of substitution between varieties from different sources," IDE Discussion Papers 740, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  • Handle: RePEc:jet:dpaper:dpaper740
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    References listed on IDEAS

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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. repec:hal:wpspec:info:hdl:2441/7o52iohb7k6srk09n8t832o04 is not listed on IDEAS
    3. Marc Melitz & Stephen Redding, 2013. "Firm Heterogeneity and Aggregate Welfare," Working Papers hal-03473900, HAL.
    4. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2011. "Structural estimation and solution of international trade models with heterogeneous firms," Journal of International Economics, Elsevier, vol. 83(2), pages 95-108, March.
    5. Ken Itakura & Kazuhiko Oyamada, 2015. "Examining Trade Response of Armington-Krugman-Melitz Encompassing Module in a CGE Model," EcoMod2015 8695, EcoMod.
    6. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    7. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    8. Marc J. Melitz & Stephen J. Redding, 2015. "New Trade Models, New Welfare Implications," American Economic Review, American Economic Association, vol. 105(3), pages 1105-1146, March.
    9. Hertel, Thomas, 1997. "Global Trade Analysis: Modeling and applications," GTAP Books, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, number 7685, March.
    10. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
    11. Zhai, Fan, 2008. "Armington Meets Melitz: Introducing Firm Heterogeneity in a Global CGE Model of Trade," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 575-604.
    12. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
    13. Costas Arkolakis & Arnaud Costinot & Dave Donaldson & Andrés Rodríguez-Clare, 2019. "The Elusive Pro-Competitive Effects of Trade," Review of Economic Studies, Oxford University Press, vol. 86(1), pages 46-80.
    14. Marc J. Melitz & Daniel Trefler, 2012. "Gains from Trade When Firms Matter," Journal of Economic Perspectives, American Economic Association, vol. 26(2), pages 91-118, Spring.
    15. 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).
    16. repec:hrv:faseco:34299161 is not listed on IDEAS
    17. repec:hal:spmain:info:hdl:2441/7o52iohb7k6srk09n8t832o04 is not listed on IDEAS
    18. 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.
    19. 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).
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Niemi, Janne, 2018. "Short-run and long-run food import elasticities with persistent trading habits," Working Papers 111, VATT Institute for Economic Research.

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    More about this item

    Keywords

    variable elasticity of substitution; preference for variety; heterogeneous firms; Business enterprises;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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