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Comparison of Welfare Gains in the Armington, Krugman and Melitz Models : Insights from a Structural Gravity Approach

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  • Balistreri,Edward Jay
  • Tarr,David G.

Abstract

How large are the estimated gains from trade from a reduction in trade costs in the heterogeneous firms Melitz (M) model compared with the Armington (A) and Krugman (K) models? Surprisingly little is known beyond the one-sector model. This paper analyzes this question using a global trade model that contains ten regions and various numbers of sectors (1-10). Following Arkolakis et al. (2012), the analysis holds the local trade response constant across the model comparisons based on a structural gravity estimate. Various model features and scenarios are introduced that are important to real economies, almost none of which has been examined across the three market structures with a constant trade response. In response to global reductions in iceberg trade costs, in all the multi-sector models, the ranking of global welfare gains is Melitz>Krugman>Armington; and the Krugman model captures between 75 and 95 percent on the additional gains above the Armington model that are estimated by the Melitz model. However, for individual regions, there are numerous cases of reversed welfare rankings. i.e., Melitz Krugman>Armington. For individual regions, however, the welfare ranking of the Armington, Krugman and Melitz market structures is model, data, parameter and scenario dependent. The results highlight the need for data and structural considerations in policy analysis.

Suggested Citation

  • Balistreri,Edward Jay & Tarr,David G., 2018. "Comparison of Welfare Gains in the Armington, Krugman and Melitz Models : Insights from a Structural Gravity Approach," Policy Research Working Paper Series 8570, The World Bank.
    • Handle: RePEc:wbk:wbrwps:8570
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    Citations

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    Cited by:

    1. Minghao Li & Edward J. Balistreri & Wendong Zhang, 2018. "The 2018 Trade War: Data and Nascent General Equilibrium Analysis," Center for Agricultural and Rural Development (CARD) Publications 18-wp587, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    2. Li, Minghao & Balistreri, Edward J. & Zhang, Wendong, 2020. "The U.S.–China trade war: Tariff data and general equilibrium analysis," Journal of Asian Economics, Elsevier, vol. 69(C).
    3. Edward J. Balistreri & David G. Tarr, 2019. "Mathematics of the Armington, Krugman and Melitz Models with Multiple Sectors and Heterogeneous Regions, with Detailed Derivations," Center for Agricultural and Rural Development (CARD) Publications 19-wp596, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    4. Edward J. Balistreri & David G. Tarr, 2022. "Welfare gains in the Armington, Krugman and Melitz models: Comparisons grounded on gravity," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1681-1703, October.
    5. Maliszewska, Maryla & Pereira, Maria Filipa Seara & Osorio Rodarte, Israel & Olekseyuk, Zoryana, 2020. "Economic and distributional Impacts of the EVFTA and CPTPP in Vietnam," Conference papers 333169, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    6. Balistreri, Edward J. & Tarr, David G., 2020. "Comparison of deep integration in the Melitz, Krugman and Armington models: The case of The Philippines in RCEP," Economic Modelling, Elsevier, vol. 85(C), pages 255-271.

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