Lecture 7 - Melitz Flashcards
(10 cards)
How does firm heterogeneity in marginal cost (productivity) impact exporting decisions in the Melitz model?
Introducing firm heterogeneity means firms have different productivity levels and thus different marginal costs.
This variation drives “selection into exporting,” where only the most productive firms can cover the fixed and variable costs associated with exporting.
What is the primary difference in equilibrium conditions between the basic Krugman (1980) model and the Melitz (2003) model?
The Krugman model requires two equilibrium conditions: monopoly pricing and free entry (zero profits in equilibrium).
The Melitz model adds a third condition related to firm exit, where firms with productivity below a certain cutoff level, earning negative profits, exit the market.
How do different types of firms fare under free trade in the Melitz Model?
Firms with the highest productivities will increase their profits and market shares.
Firms with middle productivities will contract output and earn lower operating profits.
Firms with the lowest productivities will shut down.
What empirical evidence is cited regarding the impact of the Chilean trade liberalization (1979-1985) on productivity
The Chilean trade liberalization of 1979-1985 led to a 19% productivity increase.
Approximately two-thirds of this increase was attributed to reallocation effects.
What did the study by Trefler (AER, 2004) find regarding the impact of NAFTA on Canadian export sectors that were most affected by US tariff reductions?
For these sectors, there was no significant change in employment, but labor productivity increased by 14%.
What did the study by Trefler (AER, 2004) find regarding the impact of NAFTA on Canadian import-competing sectors that were most affected by Canadian tariff reductions?
For these sectors, employment decreased by 12%, and labor productivity increased by 15% (with about half of this increase due to reallocation).
What are the three key eqm conditions for this model?
Monopoly pricing: MR =MC
Firms with productivity below a cut-off level, that would earn negative profits if they produced, exit the market
Free entry: expected profits from entering the market must be 0 in eqm
How do we obtain the eqm mass of firms in an autarky?
We start with the eqm cutoff productivity under autarky to define the average profits of a firm that produces output.
The mass is Ma = Me [1-G(phi)]
Will the aggregate price index under free trade be higher or lower that in autarky, and what implication does this have for the productivity cut off?
The aggregate price index under free trade will be lower than autarky which implies that the zero cut off productivity under free trade (higher productivity cut off).
Why does aggregate productivity rise in the FT eqm?
This is because market share reallocates to the most productive firms.
