Foundation of the Small Open Economy Model with Product Differentiation

Lorenzo Caliendo and Robert Feenstra

No 30223, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We derive a small open economy (SOE) as the limit of an economy as the number or size of its trading partners goes to infinity and trade costs also go to infinity. We obtain this limit in the Armington, Eaton-Kortum, Krugman, and Melitz models. In all cases, the trade of the SOE with the foreign countries approaches a finite limit, and the domestic expenditure share for the SOE approaches a limit that is not zero or unity. The foreign countries can be either infinitely many SOEs, or alternatively, one or many large countries with domestic expenditure shares that approach unity. We illustrate the usefulness of this framework by obtaining a formula for the optimal tariff in the SOE -- depending on the elasticity of domestic wages with respect to the tariff -- that is consistent with all models.

JEL-codes: F12 F13 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-int and nep-opm
Note: ITI
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Citations: View citations in EconPapers (6)

Published as Lorenzo Caliendo & Robert C. Feenstra, 2024. "Foundation of the small open economy model with product differentiation," Journal of International Economics, .

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