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Market size and TFP in the Melitz model
Author(s) -
Felbermayr Gabriel,
Jung Benjamin
Publication year - 2018
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12346
Subject(s) - economics , total factor productivity , productivity , market size , economies of scale , trade theory , econometrics , positive correlation , selection (genetic algorithm) , degree (music) , new trade theory , scale (ratio) , international trade , microeconomics , international economics , macroeconomics , free trade , trade barrier , medicine , physics , quantum mechanics , artificial intelligence , computer science , acoustics
Trade theory in the Krugman tradition predicts a positive correlation between market size and countries' total factor productivity (TFP). However, in the data, there is no such correlation. Models with heterogeneous firms and selection can reconcile theory and empirics, when the degree of external economies of scale is lower than assumed in the standard CES case. Realistically, larger countries have an over‐proportionate share of firms. With export selection, these countries have more input varieties available, but they also have a lower average productivity of firms. Which of these effects dominates depends on the degree of external economies of scale.