Intra-Industry Trade with Firm Heterogeneity. The Melitz Model and its Recent Extensions

Master's Thesis , 2015 , 91 Pages , Grade: 2,0

Economics - International Economic Relations

While the traditional Trade Theory is merely able to explain trade between developed and less developed countries, the more recent literature of the New Trade Theory allows for capturing trade between countries that are all highly developed. One of its models - the Melitz model of intra-industry trade (2003)
- incorporates heterogeneity in firm productivity into a framework based on Krugman (1980). The Melitz model is a corner stone of New Trade Theory models and has been extended in various papers to analyze intra-industry trade with respect to different aspects. One important aspect that is covered intensively in recent literature is the efect of unilateral trade liberalization on a country's welfare.
This thesis presents the Melitz model (2003) by firstly illustrating its fundament based onKrugman (1980) and secondly deriving its working mechanisms both for opening for trade as well as for trade liberalization. Further, extensions by Melitz and Ottaviano (2005) and Demidova and Rodriguez-Clarez (2011) will be presented. The thesis concludes by discussing the contribution of the Melitz model to explain occurring trading patterns and its limitations.

Inhaltsverzeichnis (Table of Contents)

• Introduction
• The Model of Krugman (1980)
• Closed Economy
• Open Economy
• Preliminary Result of Krugman (1980)
• The Melitz Model (2003)
• Closed Economy
• Open Economy
• Trade Liberalization
• The Extensions
• The Extension of Melitz and Ottaviano (2005)
• The Extension of Demidova and Rodríguez-Clarez (2011)
• Conclusion

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This thesis presents the Melitz model (2003), a cornerstone of New Trade Theory models, and explores its implications for understanding intra-industry trade. The work aims to illustrate the model's fundamental principles based on Krugman (1980) and to analyze its working mechanisms for both opening to trade and trade liberalization. Furthermore, it examines extensions of the Melitz model by Melitz and Ottaviano (2005) and Demidova and Rodríguez-Clarez (2011). The thesis concludes by discussing the contributions and limitations of the Melitz model in explaining observed trading patterns.

• Intra-industry trade and firm heterogeneity
• The Melitz model and its implications for trade liberalization
• Extensions of the Melitz model
• The role of firm productivity in international trade
• The impact of trade on welfare

Zusammenfassung der Kapitel (Chapter Summaries)

• Introduction: This chapter provides an overview of the existing trade models, highlighting the limitations of traditional models in explaining intra-industry trade between developed countries. It introduces the concept of New Trade Theory and its focus on imperfect competition and heterogeneous goods.
• The Model of Krugman (1980): This chapter presents the foundational model of Krugman (1980), which introduces the concept of monopolistic competition and differentiated goods. It analyzes the model's implications for both a closed economy and an open economy.
• The Melitz Model (2003): This chapter introduces the Melitz model, which extends the Krugman model by incorporating firm heterogeneity in productivity. It analyzes the model's implications for a closed economy, an open economy, and trade liberalization.
• The Extensions: This chapter examines two key extensions of the Melitz model. The first extension, by Melitz and Ottaviano (2005), incorporates quasi-linear preferences and a Pareto distribution of firm productivity. The second extension, by Demidova and Rodríguez-Clarez (2011), focuses on the effects of unilateral trade liberalization on welfare.

Schlüsselwörter (Keywords)

Key terms and concepts explored in this thesis include intra-industry trade, firm heterogeneity, the Melitz model, trade liberalization, monopolistic competition, differentiated goods, firm productivity, welfare effects, and the extensions of the Melitz model by Melitz and Ottaviano (2005) and Demidova and Rodríguez-Clarez (2011).

• College: University of Münster (Institute of International Economics)
• Grade: 2,0
• Author: Michael Betz (Author)
• Publication Year: 2015
• Pages: 91
• Catalog Number: V335618
• ISBN (eBook): 9783668257764
• ISBN (Book): 9783668257771
• Language: English
• Tags: intra-industry, trade, firm, heterogeneity, melitz, model, recent, extensions