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Melitz in GTAP Made Easy: The A2M Conversion Method and Result Interpretation

Peter Dixon and Maureen Rimmer

Centre of Policy Studies/IMPACT Centre Working Papers from Victoria University, Centre of Policy Studies/IMPACT Centre

Abstract: Since the 1970s the Armington approach has been the workhorse specification of trade in CGE models. Under Armington, agents substitute between products from different countries. Conceptually, Melitz provides a more attractive approach in which substitution is between products from different firms, rather than countries. Other attractive features of Melitz are allowance for: monopolistic competition; and economies of scale from fixed establishment costs for firms and fixed set-up costs on trade links. In this paper we show how an Armington model can be converted to Melitz by adding a few equations and introducing closure swaps, with little change to existing code. We apply our Armington-to-Melitz method to the Armington-based GTAP model to derive GTAP-A2M. Then we show how results from a CGE model with Melitz industries can be interpreted and justified via back-of-the-envelope calculations. Finally, we review the strengths and weaknesses of GTAP-HET, an alternative Melitz-based version of GTAP.

Keywords: heterogeneous firms; Armington to Melitz; GTAP-A2M; GTAP-HET; result interpretation (search for similar items in EconPapers)
JEL-codes: C68 D58 F12 (search for similar items in EconPapers)
Date: 2018-07
New Economics Papers: this item is included in nep-cmp and nep-int
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Published in Dixon, P.B., M. Jerie and M.T. Rimmer (2019), "Melitz in GTAP Made Easy: the A2M Conversion Method and Result Interpretation", Journal of Global Economic Analysis 4(1), pp.97-127. https://doi.org/10.21642/JGEA.040104AF

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