Parameterization of applied general equilibrium models with flexible trade specifications based on the Armington, Krugman, and Melitz models

This paper explains how the Armington-Krugman-Melitz supermodel developed by Dixon and Rimmer can be parameterized, and demonstrates that only two kinds of additional information are required in order to extend a standard trade model to include Melitz-type monopolistic competition and heterogeneous firms. Further, it is shown how specifying too much additional information leads to violations of the model constraints, necessitating adjustment and reconciliation of the data. Once a Melitz-type model is parameterized, a Krugman-type model can also be parameterized using the calibrated values in the Melitz-type model without any additional data. Sample code for the General Algebraic Modeling System (GAMS) has also been prepared to promote the innovative supermodel in the AGE community.

Some notes on the spatial representations

There are conventional methods to calculate the centroid of spatial units and distance among them with using Geographical Information Systems (GIS). The paper points out potential measurement errors of this calculation. By taking Indian district data as an example, systematic errors concealed in such variables are shown. Two comparisons are examined; firstly, we compare the centroid obtained from the spatial units, polygons, and the centre of each city where its district headquarters locates. Secondly, between the centres represented in the above, we calculate the direct distances and road distances obtained from each pair of two districts. From the comparison between the direct distances of centroid of spatial units and the road distances of centre of district headquarters, we show the distribution of errors and list some caveats for the use of conventional variables obtained from GIS.