Modern Trade Theory for CGE Modelling: the Armington, Krugman and Melitz Models

Peter Dixon, Michael Jerie and Maureen Rimmer

GTAP Technical Papers from Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University

Abstract: This paper is for CGE modelers and others interested in modern trade theory. The Armington specification of trade, assuming country-level product differentiation, has been central to CGE modelling for 40 years. Starting in the 1980s with Krugman and more recently Melitz, trade theorists have preferred specifications with firm-level product differentiation. We draw out the connections between the Armington, Krugman and Melitz models, deriving them as successively less restrictive special cases of an encompassing model. We then investigate optimality properties of the Melitz model, demonstrating that a Melitz general equilibrium is the solution to a global, cost-minimizing problem. This suggests that envelope theorems can be used in interpreting results from a Melitz model. Next we explain the Balistreri-Rutherford decomposition in which a Melitz general equilibrium model is broken into Melitz sectoral models combined with an Armington general equilibrium model. Balistreri and Rutherford see their decomposition as a basis of an iterative approach for solving Melitz general equilibrium models. We see it as a means for interpreting Melitz results as the outcome of an Armington simulation with additional shocks to productivity and preferences variables. With CGE modelers in mind, we report computational experience in solving a Melitz general equilibrium model using GEMPACK.

Date: 2015
New Economics Papers: this item is included in nep-cmp and nep-int
Note: GTAP Technical Paper No. 36
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.gtap.agecon.purdue.edu/resources/res_display.asp?RecordID=4595 (text/html)

Related works:
Journal Article: Modern Trade Theory for CGE Modelling: The Armington, Krugman and Melitz Models (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gta:techpp:4595

Access Statistics for this paper

More papers in GTAP Technical Papers from Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University Contact information at EDIRC.
Bibliographic data for series maintained by Jeremy Douglas ().