Abstract:

This paper reviews the new approach to international trade based on firm heterogeneity in differentiated product markets. This approach explains a variety of features exhibited in disaggregated trade data, including the higher productivity of exporters relative to non-exporters, within-industry reallocations of resources following trade liberalization, and patterns of trade participation across firms and destination markets. Accounting for these empirical patterns reveals new mechanisms through which the aggregate economy is affected by trade liberalization, including endogenous increases in average industry and firm productivity.

Chapter 1 - Heterogeneous Firms and Trade, Marc J. Melitz and Stephen J. Redding, in Elhanan Helpman, Kenneth Rogoff and Gita Gopinath (eds), Handbook of International Economics, Volume 4, 2015, pp.1-54.