Welfare gains in the Armington, Krugman and Melitz models: Comparisons grounded on gravity

Monday, April 25, 2022
Edward J. Balistreri
Yeutter Institute
David G. Tarr

Abstract

Under a wide range of model features, we show that in response to a reduction in global trade costs, the global welfare gains are largest in the Melitz model, followed by the Krugman model, and smallest in Armington. Labor-leisure choice and intermediate goods are the most important features for differentiating results. We show that the optimal tariff is significantly lower in the monopolistic competition models, thereby moving policy away from protectionism. We are the first to consider multi-sector comparative-static welfare impacts of these market structures, while maintaining equal trade responses across the models consistent with a shared structural-gravity elasticity.

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About 
Edward J. Balistreri

Balistreri is the Duane Acklie Chair at the Yeutter Institute and an economics professor in the College of Business at the University of Nebraska-Lincoln. View biography.

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About 
David G. Tarr

Tarr is a Lead Economist in the Laboratory of International Trade of the Russian Presidential Academy of National Economy and Public Administration, Moscow; an academic and policy adviser to the International School of Economics in Tbilisi (ISET); and a former Lead Economist with the World Bank. View biography.