Heterogeneous firms

Question 1

What are some challanges to new trade theory and traditional trade theory?

Answer 1

1. Heterogeneity
2. Few firms export
3. Exporters are diffrent from non-exporters
4. Reallocation between sectors

Question 2

How are exporting firms diffrent?

Answer 2

Trends in empirics: They seen to have an “exporter premia” meaning that they have som fixed effect of being more productive.

Question 3

Describe the Melitz’s model

domestically

Answer 3

1. intra-industry trade
2. Dfferentiated goods (monopolistic competition)
3. Firms enter industry by paying a fixed entry cost
4. they have random productivity
5. If productivity level is higher than threshold, the firms find it profitable to export.

Question 4

How will heterogeneous firms impact trade and distribution of firms?

Answer 4

The cut-off productivity will shift when we move from autarky to trade. Since more effective firms can enter the market, the productivity cutoff will increase leading to less efficient firms having to exit the market.

The more effecient firms will produce for both the domestic market and the export market

The most productive firms will become MNEs and engage in FDI

(The firms that are more productive will generally be larger)

Question 5

In Melitz model with trade, what will happen with the welfare?

Answer 5

There will be a reallocation of resources from least productive to more productive firms

increased industry productivity will lead to a decrease in good prices, which increases real income

Model predicts simultanious job creation and job destruction as exporting firms expand and some firms exit