Melitz & Trefler – Gains from Trade when Firms Matter (JEP 2012)

The Spring 2012 JEP has a symposium on international trade. I already mentioned the great article on the Ricardian model by Eaton and Kortum. Another very nice contribution to the symposium is a piece by Marc Melitz and Daniel Trefler on the “Gains from Trade when Firms Matter” (pdf).

Today, we focus on three sources of gains from trade: 1) love- of-variety gains associated with intra-industry trade; 2) allocative efficiency gains associated with shifting labor and capital out of small, less-productive firms and into large, more-productive firms; and 3) productive efficiency gains associated with trade-induced innovation.

This survey distills a very large body of literature. It belongs on your syllabi.