University of Nottingham Research Paper No. 2006/07
47 Pages Posted: 9 May 2006
Date Written: May 2006
In this paper we extend the Melitz (2003) heterogeneous firm trade model to include differences in country sizes and production technologies. We begin by characterising a "superior" technology, in terms of both survival cutoffs and representative firm productivity, and then examine a (costly) trading equilibrium between a leading and laggard country. We find that the intra-industry market share reallocations towards more efficient firms are stronger in the leading country. The numbers of firms depend on both country size and technology differences. Other things equal, the leading or the larger country tends to run a trade surplus in differentiated products, and, if technology or size differences are sufficiently large, the smaller or laggard country will cease production of differentiated products. A fall in unit trade costs will always benefit the leading country, but may hurt the laggard if technology differences are large enough and the laggard has the larger market.
Keywords: heterogeneous firms, technology differences, trade liberalisation
JEL Classification: F12
Suggested Citation: Suggested Citation
Falvey, Rod and Greenaway, David and Yu, Zhihong, Extending the Melitz Model to Asymmetric Countries (May 2006). University of Nottingham Research Paper No. 2006/07. Available at SSRN: https://ssrn.com/abstract=900143 or http://dx.doi.org/10.2139/ssrn.900143