GTAP-HET: Introducing Firm Heterogeneity into the GTAP Model

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Zeynep Akgul
Nelson B. Villoria
Thomas W. Hertel


Computable General Equilibrium (CGE) models incorporating firm heterogeneity can overcome the shortcomings of traditional Armington-based models in explaining changes in productivity and variety in the wake of reduced trade costs. In this paper, we present a new modeling framework where the firm heterogeneity theory of Melitz is introduced into the Global Trade Analysis Project (GTAP) model and calibrated to the GTAP 8 Data Base. The new mechanisms in the model are demonstrated in a stylized scenario with 3 regions (USA, Japan and the Rest of the World) and 2 sectors (manufacturing and non-manufacturing) where the elimination of tariffs levied by Japan on the import of US manufacturing goods is examined. Results are compared with those under monopolistic competition motivated by Krugman and under perfect competition motivated by Armington. The firm heterogeneity model incorporates endogenous variety, scale, productivity, and fixed cost effects into welfare change in addition to the traditional allocative efficiency and terms of trade effects. We observe that these effects are significant sources of welfare change. GTAP-HET presents the first GTAP implementation of firm heterogeneity. It is a powerful tool for policy analysis with improved abilities in tracing out productivity changes and entry/exit of firms following trade liberalization scenarios.

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How to Cite
Akgul, Z., Villoria, N. B., & Hertel, T. W. (2016). GTAP-HET: Introducing Firm Heterogeneity into the GTAP Model. Journal of Global Economic Analysis, 1(1), 111–180.
Advances in Methods and Theory
Author Biographies

Zeynep Akgul, Purdue University

Post-Doctoral Research Associate in the Department of Agricultural Economics

Nelson B. Villoria, Kansas State University

Assistant Professor in the Department of Agricultural Economics

Thomas W. Hertel, Purdue University

Distinguished Professor in the Department of Agricultural Economics and the Executive Director of the Center for Global Trade Analysis