Converting an Armington Model into a Melitz Model: Giving Melitz Sectors to GTAP

  • Peter B. Dixon
  • Michael Jerie
  • Maureen T. Rimmer
Chapter
Part of the Advances in Applied General Equilibrium Modeling book series (AAGEM)

Abstract

This chapter describes how to convert an existing Armington CGE model into a Melitz CGE model with minimal changes to the original Armington model. The main task is to add equations to the bottom of the Armington model to form what we call an Armington-to-Melitz or A2M system. With an A2M system, industries can be switched between Armington and Melitz treatments by closure swaps. We use BasicArmington (a simple Armington model) to explain how to create an A2M system. Then we apply the method to a 10-region, 57-commodity version of the frequently applied policy-oriented GTAP model to create a GTAP-A2M system. Using this system, we compare the effects under Armington and Melitz assumptions of a tariff imposed by North America on imports of wearing apparel (Wap). To facilitate the comparison, we decompose the welfare effects for each region into parts attributable to changes in employment, terms of trade and scale-related efficiency. This helps us to understand how each of these factors operates under Armington and Melitz, but it does not give us an intuitive explanation of their net outcome. To explain net outcomes for welfare effects by region we set out an intuitive overarching theory. We check its validity by back-of-the-envelope (BOTE) calculations using GTAP data items and selected simulation results. BOTE calculations enable us to cut through the maze of complications in CGE models to locate, for any specific result, the essential underlying ingredients.

Keywords

Converting Armington to Melitz BasicArmington-A2M system GTAP-A2M system BOTE calculations Welfare decomposition 

Supplementary material

332135_1_En_7_MOESM1_ESM.zip (81.3 mb)
Supplementary material 1 (ZIP 21247 kb)

References

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  2. Balistreri, E., & Rutherford, T. (2013). Computing general equilibrium theories of monopolistic competition and heterogeneous firms (chapter 23). In P.B. Dixon, & D.W. Jorgenson (Eds), Handbook of computable general equilibrium modeling (pp. 1513–1570). Elsevier.Google Scholar
  3. Hertel, T. W. (Ed.). (1997). Global trade analysis: Modeling and applications. Cambridge, UK: Cambridge University Press.Google Scholar
  4. Melitz, Marc J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 1695–1725.CrossRefGoogle Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2018

Authors and Affiliations

  • Peter B. Dixon
    • 1
  • Michael Jerie
    • 1
  • Maureen T. Rimmer
    • 2
  1. 1.Centre of Policy StudiesVictoria UniversityMelbourneAustralia
  2. 2.Centre of Policy StudiesVictoria UniversityMelbourneAustralia

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