 Armington Meets Melitz: Introducing Firm Heterogeneity in a Global CGE Model of TradeJournal of Economic Integration, 2008, vol. 23, 575-604 Abstract: Traditional CGE models with Armington assumption fail to capture the extensive margin of trade, thereby underestimate the trade and welfare effects of trade opening. To address this problem, this paper introduces the Melitz (2003) theoretical framework with firm heterogeneity and fixed exporting costs into a global CGE model. Some illustrative simulations show that the introduction of firm heterogeneity improves the ability of CGE model to capture the trade expansion and welfare effects of trade liberalization. Under the case of global manufacturing tariff cut, the estimated gains in welfare and exports are more than double that obtained from the standard Armington CGE model. Sensitivity analysis indicates that model results are sensitive to the shape parameters of firm productivity distribution, suggesting the need of further empirical work to estimate the degree of firm heterogeneity. Keywords: firm heterogeneity; CGE; trade liberalization (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0446 Access Statistics for this article Journal of Economic Integration is currently edited by Seongeun Kim More articles in Journal of Economic Integration from Center for Economic Integration, Sejong University Contact information at EDIRC. |
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