The Simple Analytics of the Melitz Model in a Small Open Economy
NBER Working Paper No. 17521
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.
This paper was revised on March 20, 2013
Document Object Identifier (DOI): 10.3386/w17521
Published: “The Simple Analytics of the Melitz Model in a Small Economy” (with Andrés Rodríguez-Clare), Journal of International Economics, July 2013, 90(2), pp. 266-272
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