International Trade and Heterogeneous Firms


Melitz, Marc. 2008. “International Trade and Heterogeneous Firms.” New Palgrave Dictionary of Economics, 2nd Edition. Palgrave Macmillan.


Empirical studies of production units within sectors have reported a massive amount of
heterogeneity in various performance measures (most notably, size and productivity). This
heterogeneity, within sectors, matters for theoretical and empirical models of trade. Trade,
or trade liberalization more generally, induces important reallocations between heterogeneous
producers in a sector: the smallest or least productive producers are forced to exit, and market
shares are further reallocated between less productive producers (who do not export) towards
larger, more productive exporters. These reallocations generate a new channel for productivity
and welfare gains from trade.

Last updated on 12/11/2013