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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. Richard E. Baldwin & Rikard Forslid, 2006. "Trade Liberalization with Heterogenous Firms," NBER Working Papers 12192, National Bureau of Economic Research, Inc.
  2. Gene M. Grossman & Elhanan Helpman & Adam Szeidl, 2003. "Optimal Integration Strategies for the Multinational Firm," Harvard Institute of Economic Research Working Papers 2024, Harvard - Institute of Economic Research.
  3. Davin Chor, 2006. "Subsidies for FDI: Implications from a Model with Heterogenous Firms," 2006 Meeting Papers 475, Society for Economic Dynamics.
  4. Demidova, Svetlana, 2005. "Productivity Improvements and Falling Trade Costs: Boon or Bane?," Working Papers 2-05-1, Pennsylvania State University, Department of Economics.
  5. Baldwin, Richard & Okubo, Toshihiro, 2009. "Tax reform, delocation and heterogeneous firms," CEPR Discussion Papers 7340, C.E.P.R. Discussion Papers.
  6. 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.
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