Ricardian model of trade (1817)

Countries dier in their technology.

Motive for trade: comparative advantages.
Key assumption: it is easier to move goods than technologies.
Comparative Advantage determines pattern of trade

Heckscher-Ohlin model of trade (1933)

Countries dier in their factor endowments.

Comparative advantage comes from differences in relative factor endowments.
Motive for trade: endogenous dierences in technology.
Key nding: trade alone may equalize factor prices-Free and competitive trade will make
factor prices converge along with traded goods prices.
Key assumption: it is easier to trade goods than factors of production

Krugman model of trade (1979-80)

Countries have identical technologies, factor endowments, preferences...
Dierentiated goods implies consumers want to consume all possible goods.
Increasing returns to scale implies countries specialize in producing a subset of goods.

Melitz Model
He extends the Krugman (1980) model by introducing
productivity dierences across rms.
Only the rms with a productivity level above an
endogenously determined cuto can survive. This cuto tends
to increase when the countries open up to two-way trade: this
is the rst selection eect of trade.
In the model, only the rms that are suciently productive
decide to enter the foreign markets: this is the second selection
eect of trade.
Melitz (2003) shows that, through these selection eects, trade
leads to aggregate productivity gains that raise welfare.

Bustos Model
Melitz emphasized the channel: trade integration reallocates market shares towards
exporters, the most productive firms, increasing aggregate productivity. Bustos show
that, in addition, the resulting increase in revenues can induce exporters to invest in
new technologies.
Firms are maximizing prot using two different types of technologies, l and h (R&D
intensive)
The two parameters, and , both greater than one, describe the difference between
high- and low-tech production: Fixed costs are higher and the return is lower
marginal costs.
The model identies three thresholds for the rms marginal costs under constant
elasticity of substitution. Firms are split into three categories. Type 1 rms are using
older technology, l, caused by no R&D and no export activity. Type 2 rms are
export-active but without investments in R&D (technology l), and nally Type 3
rms are the high-tech rms with R&D investments (technology h), and these rms
will always operate on the export markets.

Delgado et al.(2002) suggest a test procedure to test differences between the three
regimes of production. Focussing on stochastic dominance of the cumulative
productivity distribution,
(i) productivity functions of exporting rms will dominate stochastically the function
of nonexporting rms reecting self-selection and learning-by-exporting
(ii) rms entering export marked will dominate/have higher productivity than the rms
remaining as nonexporters
(iii) rms remaining as exporters will dominate rms exiting from the export markets
(iv) productivity-growth of exporters will be higher than/dominate that of nonexporting
rms.
The test procedure is based on comparing two cumulative productivity distributions
using a one-sided test:
H0 : sup F(z)-G(z) = 0 versus
H1 : sup F(z)-G(z) >0
And the test statistics for the nonparametric Kolmogorov Smirnov testis used.