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A Parsimonious Approach to Incorporate Firm Heterogeneity in CGE-Models

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  • Eddy Bekkers
  • Joseph Francois

Abstract

This paper proposes a parsimonious and intuitive way to incorporate Melitz-type firm heterogeneity in a CGE-model based on the conventional Armington trade structure. The Armington trade structure is extended with demand, supply, and trade cost shifters. Each sector can be modelled as either Melitz, Ethier-Krugman, or Armington, depending on the specification chosen for the shifters. The trade structure of the model can be calibrated based on two estimable parameters: the trade or tariff elasticity and the shape parameter of the size distribution of firms. With this setup fixed and iceberg trade costs are calibrated jointly based on observed import shares. The structure is incorporated within the standard GTAP model and changes to the GEMPACK code are discussed in detail. Changes in both trade values and welfare are decomposed. Experiments with global reductions in iceberg and fixed trade costs are simulated in a medium-size model with 11 countries, 11 sectors, and 6 production factors. The experiments show that the welfare effects are largest under Melitz, followed by Ethier-Krugman and Armington, although differences are modest.

Suggested Citation

  • Eddy Bekkers & Joseph Francois, 2018. "A Parsimonious Approach to Incorporate Firm Heterogeneity in CGE-Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 3(2), pages 1-68, December.
  • Handle: RePEc:gta:jnlgea:v:3:y:2018:i:2:p:1-68
    DOI: http://dx.doi.org/10.21642/JGEA.030201AF
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    Cited by:

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    3. Oliveira, Paulo Felipe & Cordeiro, Pedro Antero, 2023. "Trade policy analysis in Brazil: Assessing welfare impacts with revised Armington elasticities," Economic Modelling, Elsevier, vol. 129(C).
    4. Aguiar, Angel & Corong, Erwin L. & van der Mensbrugghe, Dominique & Bekkers, Eddy & Koopman, Robert Bernard & Teh, Robert, 2019. "The WTO Global Trade Model: Technical documentation," WTO Staff Working Papers ERSD-2019-10, World Trade Organization (WTO), Economic Research and Statistics Division.
    5. Bekkers, Eddy & Teh, Robert, 2019. "Potential economic effects of a global trade conflict: Projecting the medium-run effects with the WTO global trade model," WTO Staff Working Papers ERSD-2019-04, World Trade Organization (WTO), Economic Research and Statistics Division.
    6. Kox, Henk L.M., 2022. "A micro-macro model of foreign direct investment: Knowledge-based gravity forces, self-selection and third-country effects," EconStor Preprints 266494, ZBW - Leibniz Information Centre for Economics.
    7. Peter B. Dixon & Maureen T. Rimmer, 2024. "Small group monopolistic competition in a GTAP model: meeting the Markusen challenge," Centre of Policy Studies/IMPACT Centre Working Papers g-347, Victoria University, Centre of Policy Studies/IMPACT Centre.
    8. Biyik, Onur, 2020. "Winner and Loser in Terms of the FTAs and the Trade War: Case Study of the Japanese Market. Examination of the GTAP10 Database," Conference papers 333233, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    9. Botero García, Jesús Alonso & Hurtado, Alvaro & Montañez Herrera, Diego Fernando, 2021. "The productivity of the agricultural sector and its effects on economic growth: a CGE analysis," Conference papers 333318, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    10. Bekkers, Eddy & Teh, Robert, 2019. "Potential Economic Effects of a Global Trade Conflict: Projecting the medium-run effects with the WTO Global Trade Model," Conference papers 333120, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    11. Peter Dixon & Michael Jerie & Maureen Rimmer, 2019. "Melitz in GTAP Made Easy: the A2M Conversion Method and Result Interpretation," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 4(1), pages 97-127, June.
    12. Kox, Henk L.M., 2022. "Explaining foreign direct investment patterns: a testable micro-macro gravity model for FDI," MPRA Paper 115273, University Library of Munich, Germany.
    13. Bourne, Mike & Gray, Clare & Cooke, Edgar & Humphreys, Lee, 2020. "Agri-food trade in GTAP-HET: Returns to scale in agriculture, and the Melitz model," Conference papers 330206, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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