Working Paper: NBER ID: w17521
Authors: Svetlana Demidova; Andrs Rodriguez-Clare
Abstract: In this paper we present a version of the Melitz (2003) model for the case of a small economy and summarize its key relationships with the aid of a simple figure. We then use this figure to provide an intuitive analysis of the implications of asymmetric changes in trade barriers and show that a decline in import costs always benefits the liberalizing country. This stands in contrast to variants of the Melitz model with a freely traded (outside) sector, such as Demidova (2008) and Melitz and Ottaviano (2008), where the country that reduces importing trade costs experiences a decline in welfare.
Keywords: Firm heterogeneity; Small economy; Trade liberalization
JEL Codes: F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decline in import costs (F14) | increase in welfare (I38) |
| decline in import costs (F14) | decline in wages (J31) |
| decline in wages (J31) | increase in exports (F10) |
| higher wages (J39) | increase in productivity cutoff (O49) |
| increase in productivity cutoff (O49) | decline in exports (F14) |
| decline in productivity cutoff (D24) | decline in wages (J31) |
| decline in variable cost of exporting (F14) | increase in welfare (I38) |
| decline in variable cost of exporting (F14) | higher wages (J39) |
| decline in variable cost of exporting (F14) | decrease in productivity cutoff (D24) |