@article{Zhai:331646,
      recid = {331646},
      author = {Zhai, Fan},
      title = {Armington Meets Melitz: Introducing Firm Heterogeneity in  Global CGE Model of Trade},
      address = {2007},
      pages = {30},
      year = {2007},
      note = {Presented at the 10th Annual Conference on Global Economic  Analysis, Purdue University, USA; Journal of Economic  Integration Vol. 23. No. 3},
      abstract = {Traditional CGE models with Armington assumption fail to  capture the extensive margin of trade, thereby  underestimate the trade and welfare effects of trade  opening. To address this problem, this paper introduces the  Melitz (2003) theoretical framework with firm heterogeneity  and fixed exporting costs into a global CGE model. Some  illustrative simulations show that the introduction of firm  heterogeneity improves the ability of CGE model to capture  the trade expansion and welfare effects of trade  liberalization. Under the case of global manufacturing  tariff cut, the estimated gains in welfare and exports are  more than double of that obtained from standard Armington  CGE model. Sensitivity analysis also indicates that model  results are sensitive to the shape parameters of firm  productivity distribution, suggesting the need of further  empirical work to estimate the degree of firm  heterogeneity.},
      url = {http://ageconsearch.umn.edu/record/331646},
}