Modern Trade Theory for CGE Modelling: the Armington, Krugman and Melitz Models

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Dixon, Peter, Jerie, Michael and Rimmer, Maureen T (2015) Modern Trade Theory for CGE Modelling: the Armington, Krugman and Melitz Models. Technical Report. Purdue University, Center for Global Trade Analysis, Department of Agricultural Economics, Lafayette, Indiana.

Abstract

This paper is for CGE modelers and others interested in modern trade theory. The Armington specification of trade, assuming country-level product differentiation, has been central to CGE modelling for 40 years. Starting in the 1980s with Krugman and more recently Melitz, trade theorists have preferred specifications with firm-level product differentiation. We draw out the connections between the Armington, Krugman and Melitz models, deriving them as successively less restrictive special cases of an encompassing model. We then investigate optimality properties of the Melitz model, demonstrating that a Melitz general equilibrium is the solution to a global, cost-minimizing problem. This suggests that envelope theorems can be used in interpreting results from a Melitz model. Next we explain the Balistreri-Rutherford decomposition in which a Melitz general equilibrium model is broken into Melitz sectoral models combined with an Armington general equilibrium model. Balistreri and Rutherford see their decomposition as a basis of an iterative approach for solving Melitz general equilibrium models. We see it as a means for interpreting Melitz results as the outcome of an Armington simulation with additional shocks to productivity and preferences variables. With CGE modelers in mind, we report computational experience in solving a Melitz general equilibrium model using GEMPACK.

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Additional Information

GTAP Technical Paper No. 36

Item type Monograph (Technical Report)
URI https://vuir.vu.edu.au/id/eprint/29317
DOI https://doi.org/10.21642/JGEA.010101AF
Official URL https://www.gtap.agecon.purdue.edu/resources/res_d...
Subjects Historical > FOR Classification > 1402 Applied Economics
Current > Division/Research > Centre of Policy Studies (CoPS)
Keywords CGE modelling; General equilibrium models; international trade
Citations in Scopus 26 - View on Scopus
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