A Model of Trade with Ricardian Comparative Advantage and Intra-Sectoral Firm Heterogeneity
36 Pages Posted: 17 Nov 2011
There are 2 versions of this paper
A Model of Trade with Ricardian Comparative Advantage and Intra-Sectoral Firm Heterogeneity
A Model of Trade with Ricardian Comparative Advantage and Intra-Sectoral Firm Heterogeneity
Date Written: November 17, 2011
Abstract
In this paper, we merge the heterogenous firm trade model of Melitz (2003) with the Ricardian model of Dornbusch, Fisher and Samuelson (DFS 1977) to explain how the pattern of international specialization and trade is determined by the interaction of comparative advantage, economies of scale, country sizes and trade barriers. The model is able to capture the existence of inter-industry trade and intra-industry trade in a single unified framework. It explains how trade openness affects the pattern of international specialization and trade. It generalizes Melitz’s firm selection effect in the face of trade liberalization to a setting where the patterns of inter-industry trade and intra-industry are endogenous. Although opening to trade is unambiguously welfare-improving in both countries, trade liberalization can lead to an counter-Melitz effect in the larger country if it is insufficiently competitive in the sectors where it has the strongest comparative disadvantage but still produces. In this case, the operating productivity cutoff is lowered while the exporting cutoff increases in the face of trade liberalization. This is because the intersectoral resource allocation (IRA) effect dominates the Melitz effect in these sectors. Consequently, the larger country can lose from trade liberalization. Some hypotheses related to firms’ exporting behavior across sectors upon opening up to trade and upon trade liberalization are also derived. Analyses of firm-level data of Chinese manufacturing sectors confirm these hypotheses.
Keywords: inter-industry trade, intra-industry trade, heterogeneous firms, trade liberalization
JEL Classification: F120, F140
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
General Equilibrium Analysis of the Eaton-Kortum Model of International Trade
By Fernando Alvarez and Robert E. Lucas
-
Railroads of the Raj: Estimating the Impact of Transportation Infrastructure
-
Unpacking Sources of Comparative Advantage: A Quantitative Approach
By Davin Chor
-
By Jean M. Imbs and Isabelle Mejean
-
The Elasticity of Trade: Estimates and Evidence
By Ina Simonovska and Michael E. Waugh
-
The Elasticity of Trade: Estimates and Evidence
By Ina Simonovska and Michael E. Waugh
-
By Robert Dekle, Jonathan Eaton, ...
-
What Goods Do Countries Trade? A Quantitative Exploration of Ricardo's Ideas
By Arnaud Costinot, Dave Donaldson, ...
-
Estimates of the Trade and Welfare Effects of NAFTA
By Lorenzo Caliendo and Fernando Parro