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

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  • Svetlana Demidova
  • Andrés Rodríguez-Clarez

Abstract

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.

Suggested Citation

  • Svetlana Demidova & Andrés Rodríguez-Clarez, 2011. "The Simple Analytics of the Melitz Model in a Small Open Economy," NBER Working Papers 17521, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17521
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    File URL: http://www.nber.org/papers/w17521.pdf
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    References listed on IDEAS

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    1. Richard E. Baldwin & Rikard Forslid, 2010. "Trade Liberalization with Heterogeneous Firms," Review of Development Economics, Wiley Blackwell, vol. 14(2), pages 161-176, May.
    2. Grossman, Gene M. & Helpman, Elhanan & Szeidl, Adam, 2006. "Optimal integration strategies for the multinational firm," Journal of International Economics, Elsevier, vol. 70(1), pages 216-238, September.
    3. Demidova, Svetlana & Rodríguez-Clare, Andrés, 2009. "Trade policy under firm-level heterogeneity in a small economy," Journal of International Economics, Elsevier, vol. 78(1), pages 100-112, June.
    4. 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.
    5. Richard Baldwin & Toshihiro Okubo, 2009. "Tax Reform, Delocation, and Heterogeneous Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(4), pages 741-764, December.
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    Cited by:

    1. Benedikt Heid & Mario Larch & Alejandro Riaño, 2011. "Maquiladoras and Informality: A Mixed Blessing," CESifo Working Paper Series 3689, CESifo Group Munich.
    2. Gabriel Felbermayr & Benjamin Jung, 2011. "Home Market Effects and the Single-Sector Melitz Model," CESifo Working Paper Series 3695, CESifo Group Munich.
    3. 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.
    4. Gabriel Felbermayr & Benjamin Jung, 2012. "Unilateral Trade Liberalization in the Melitz Model: A Note," Economics Bulletin, AccessEcon, vol. 32(2), pages 1724-1730.
    5. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, Elsevier.
    6. Paz, Lourenco, 2012. "The impacts of trade liberalization on informal labor markets: an evaluation of the Brazilian case," MPRA Paper 38858, University Library of Munich, Germany.

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    JEL classification:

    • F1 - International Economics - - Trade

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