Illustrative GEMPACK Computations in a General Equilibrium Model with Melitz Sectors
One way to learn about the theoretical properties of a model is to construct and apply a simple numerical version. This is also a good preparation for creating policy-relevant models. Here we describe MelitzGE, a simplified Melitz general equilibrium model implemented with stylized data. Using MelitzGE we start by conducting simulations for which the results can be known a priori. Test simulations such as these check the coding of models. They can also expose theoretical properties. For example, a MelitzGE test simulation of the effects of a uniform 1% world-wide increase in employment shows a uniform increase in consumption of more than 1%, determined by the substitution elasticity σ. Sorting out why this is so helps us understand how love of variety and scale operate in Melitz. Next we conduct tariff simulations. Using the Balistreri-Rutherford decomposition discussed in Chap. 5, we find that Melitz love-of-variety and productivity effects tend to cancel out leaving welfare determined by phenomena familiar from Armington: terms-of-trade and efficiency effects. Recognition that these effects depend on tariff levels and trade-flow sensitivity to tariff changes leads to an investigation of the equivalence between Armington and Melitz models when calibrated to produce similar trade sensitivities. The GEMPACK code for our computations is in an appendix. As illustrated in this chapter and the next, GEMPACK is ideal software for Melitz-style CGE modelling. Nevertheless, readers will not need to be familiar with GEMPACK or follow the GEMPACK code to understand the chapter.
KeywordsTest simulations Melitz in GEMPACK Welfare decomposition Armington-Melitz equivalence
- Abayasiri-Silva, K., & Horridge, J. M. (1998). Economies of scale and imperfect competition in an applied general equilibrium model of the Australian economy (Chap. 14). In: K. J. Arrow, Y.-K. Ng & X. Yang (Eds.), Increasing returns and economic analysis (pp. 307–334 ). Great Britain: Macmillan Press Ltd; New York:St. Martin’s Press, Inc.Google Scholar
- Arkolakis, C., Demidova, S., Klenow, P. and Rodriguez-Clare, A. (2008). “Endogenous variety and the gains from trade?” American Economic Review, 98(2), 444–450.Google Scholar
- Balistreri, E., & Rutherford T. (2013). Computing general equilibrium theories of monopolistic competition and heterogeneous firms (Chap. 23). In: P. B. Dixon & D. W. Jorgenson (Eds.), Handbook of computable general equilibrium modeling (pp. 1513–1570.). Amsterdam:Elsevier.Google Scholar
- Dixon, P. B., Parmenter, B. R., Sutton J., Vincent, D. P. (1982). ORANI: A multisectoral model of the Australian economy. Contributions to economic analysis 142 (pp. xviii + 372). North-Holland Publishing Company.Google Scholar
- Dixon, P. B., Koopman R. B., and Rimmer, M.T. (2013). The MONASH style of CGE modeling: a framework for practical policy analysis (Chap. 2). In: P. B. Dixon & D. W. Jorgenson (Eds.), Handbook of computable general equilibrium modeling (pp. 23–102). Amsterdam: Elsevier.Google Scholar
- Horridge, J. M. (1987). The long-term costs of protection: Experimental analysis with different closures of an Australian computable general equilibrium model. Ph. D. thesis (pp. xii+315+appendices). University of Melbourne.Google Scholar
- Johansen, L. (1960), A multisectoral study of economic growth. Contributions to economic analysis 21 (pp. vii +177). North-Holland Publishing Company.Google Scholar
- Swaminathan, P., & Hertel, T. (1996), Introducing monopolistic competition into the GTAP model. GTAP Technical Paper No. 6, available at https://www.gtap.agecon.purdue.edu/resources/download/1565.pdf.