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The Simple Analytics of the Melitz Model in a Small Open Economy

  • Svetlana Demidova
  • Andrés Rodríguez-Clarez

In this paper we present a version of the Melitz (2003) model for the case of a small economy and summarize its key relationships with the aid of a simple figure. We then use this figure to provide an intuitive analysis of the implications of asymmetric changes in trade barriers and show that a decline in import costs always benefits the liberalizing country. This stands in contrast to variants of the Melitz model with a freely traded (outside) sector, such as Demidova (2008) and Melitz and Ottaviano (2008), where the country that reduces importing trade costs experiences a decline in welfare.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17521.

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Date of creation: Oct 2011
Date of revision:
Publication status: published as “The Simple Analytics of the Melitz Model in a Small Economy” (with Andrés Rodríguez-Clare), Journal of International Economics, July 2013, 90(2), pp. 266-272
Handle: RePEc:nbr:nberwo:17521
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  1. Svetlana Demidova, 2008. "Productivity Improvements And Falling Trade Costs: Boon Or Bane?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1437-1462, November.
  2. Svetlana Demidova & Andrés Rodríguez-Clare, 2007. "Trade Policy under Firm-Level Heterogeneity in a Small Economy," NBER Working Papers 13688, National Bureau of Economic Research, Inc.
  3. Davin Chor, 2007. "Subsidies for FDI: Implications from a Model with Heterogeneous Firms," Working Papers 04-2007, Singapore Management University, School of Economics.
  4. Grossman, Gene & Helpman, Elhanan & Szeidl, Adam, 2004. "Optimal Integration: Strategies for the Multinational Firm," CEPR Discussion Papers 4477, C.E.P.R. Discussion Papers.
  5. Baldwin, Richard & Forslid, Rikard, 2004. "Trade Liberalization with Heterogenous Firms," CEPR Discussion Papers 4635, C.E.P.R. Discussion Papers.
  6. Richard Baldwin & Toshihiro Okubo, 2009. "Tax reform, delocation and heterogeneous firms," NBER Working Papers 15109, National Bureau of Economic Research, Inc.
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