What are the four stylized facts explained by the Melitz model?
Exporting firms are in the minority, are larger & more productive than non-exporting firms
Firms exporting to more than one country are larger and more productive than the average exporter
Multinational firms are larger and more productive than exporting firms
Trade liberlaization is generally associated with reallocation of resources towards more productive firms
What is the main determinator for the export behavior of firms in the Melitz model and how is it generally derived?
Export behavior is mainly based on a firms’ sales profit in different markets
Sales profits dependent on productivity, demand in the respective markets, and (fixed) costs
Demand dependent on demand curve position, price and price elasticity
Marginal cost MC=
fixed cost f
Price dependent on productivity and price elasticity (infinitely high elasticity = perfect competition)
Sales profits in domestic market:
—> B: proxy for domestic demand
—> Omega: proxy for productivity
How does Melitz explain: “Exporting firms are in the minority, are larger & more productive than non-exporting firms”?
Profits of domestic firm in domestic market:
Profits of domestic firms in foreign market:
—> with higher marginal cost , because variable trade cost must be included:
—> leads to higher price in foreign market
How does Melitz explain: “Firms exporting to more than one country are larger and more productive than the average exporter”?
One big and one small foreign countries
Domestic firms’ sales profits
—> small markets hardly profitable
How does Melitz explain: “Multinational firms are larger and more productive than exporting firms”?
export vs FDI decision
Production abroad: save trade cost but duplicate production plant fixed cost
—> going multinational is costly in terms of fixed costs, whereas exporting is costly in terms of variable costs
foreign sales profits for multinational firm:
with
How does Melitz explain: “Trade liberalization is generally associated with reallocation of resources towards more productive firms”?
Relax assumption that A (position of demand curve) is constant
—> depends on trade regime
Trade liberalization reduces domestic firms’ profits in domestic market
for exporters: loss of domestic market share is overcompensated by foreign sales —> expansion
Positive net gain for society at expense of low-productivity firms and individuals
Globalization makes simple things (selling to your neighbor) harder (due to foreign competition) and hard things (selling to distant consumers) possible (due to the fall of trade barriers).
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