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GTAP Resource #4190

"Incorporating firm heterogeneity into the GTAP Model"
by Itakura, Ken and Kazuhiko Oyamada

This study shows how to incorporate firm heterogeneity into the GTAP model. For this GTAP model extension, we relied on four recent studies as our fundamental building blocks. Adopting the theoretical framework of Melitz (2003), Balisteri and Rutherford (2012) presented a CGE model of international trade with heterogeneous firms. Dixon and Rimmer (2012), inspired by Balisteri and Rutherford (2012), showed a common basic trade model that generalizes Armington, Krugman, and Melitz model. Oyamada (2013) developed a stylized CGE model that captures the basic trade treatment of Dixon and Rimmer (2012), and also discovered an innovative calibration method for the Melitz model as well as the Krugman model.
Following the modeling strategy explained in Oyamada (2013), we begin modifying the GTAP model by flattening the doubly nested Armington structure of international trade, and we also redefine data on trade flows in the GTAP Data Base (version 8.0). We implement a calibration module by formulating and solving a system of level equations in GEMPACK, targeting at fixed costs of the Melitz model and of the Krugman model, mass of firms, and distribution of goods over trade route. There would be some computational difficulties in the calibration process. We proceed to incorporate two alternative trade modules of Melitz and Krugman, by linearizing level equations in Oyamada (2013) in addition to the calibration results.
We run illustrative simulations with the modified GTAP model with Armington, Krugman, and Melitz module to draw a comparison between them. To highlight the empirical facts about firm heterogeneity, our focus will be on exporting firms, their productivities, and average productivity at industry level responding to a trade liberalization shock.
Appendices list correspondence between the GEMPACK source code of GTAP model and the GAMS source code of Oyamada (2013), and modifications we introduced in the source code of GTAP model.

Resource Details (Export Citation) GTAP Keywords
Category: 2013 Conference Paper
Status: Published
By/In: Presented at the 16th Annual Conference on Global Economic Analysis, Shanghai, China
Date: 2013
Version: 0.1: Preliminary and incomplete
Created: Itakura, K. (4/15/2013)
Updated: Itakura, K. (4/16/2013)
Visits: 1,788
- Calibration and parameter estimation
- Software and modeling tools
- Technological change
- The GTAP Data Base and extensions
- Not Applicable

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