Traditional computable general equilibrium (CGE) models based on the Armington assumption fail to capture the extensive margin of trade, and thereby underestimate the trade and welfare effects of trade opening. To address this problem, this paper introduces the Melitz (2003) theoretical...

"This paper presents a model of international trade that features heterogeneous firms, relative endowment differences across countries, and consumer taste for variety. The paper demonstrates that firm reactions to trade liberalization generate endogenous Ricardian productivity responses at the...