Question

The Melitz model allows us to describe the intra-industry reallocation brought about by trade liberalization. Describe the adjustment processes triggered by trade liberalization in the Melitz model in detail. Use suitable graphs to illustrate your arguments.

Answer 1

INTRODUCTION:

Recent empirical research using longitudinal plant or firm-level data from several countries has overwhelmingly substantiated the existence of large and persistent productivity difference among establishment in the same narrowly defined industries.some of these studies have further shown than these productivity differences are strongly correlated with the establishment's export status.Relatively more productive establishment are much more likly to export(even within so-called"export sector",a substantial portion of establishment do not export).other studies have highlighted the large levels of resource reallocations that occurs across establishment in the same industry

This empirial work prompted the development of models with hetrogeneous firms in open economic that capture how changes in the extent of globalization.