Domestic, vertical, and horizontal multinationals : a general equilibrium approach using the "knowledge capital model"

One of the key factors behind the growth in global trade in recent decades is an increase in intermediate input as a result of the development of vertical production networks (Feensta, 1998). It is widely recognized that the formation of production networks is due to the expansion of multinational enterprises' (MNEs) activities. MNEs have been differentiated into two types according to their production structure: horizontal and vertical foreign direct investment (FDI). In this paper, we extend the model presented by Zhang and Markusen (1999) to include horizontal and vertical FDI in a model with traded intermediates, using numerical general equilibrium analysis. The simulation results show that horizontal MNEs are more likely to exist when countries are similar in size and in relative factor endowments. Vertical MNEs are more likely to exist when countries differ in relative factor endowments, and trade costs are positive. From the results of the simulation, lower trade costs of final goods and differences in factor intensity are conditions for attracting vertical MNEs.

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.

Neutrality in the choice of number of firms or level of fixed costs in calibrating an Armington-Krugman-Melitz encompassing module for applied general equilibrium models

This paper shows how an Armington-Krugman-Melitz encompassing module based on Dixon and Rimmer (2012) can be calibrated, and clarifies the choice of initial levels for two kinds of number of firms, or parameter values for two kinds of fixed costs, that enter a Melitz-type specification can be set freely to any preferred value, just as the cases we derive quantities from given value data assuming some of the initial prices to be unity. In consequence, only one kind of additional information, which is on the shape parameter related to productivity, just is required in order to incorporate Melitz-type monopolistic competition and heterogeneous firms into a standard applied general equilibrium model. To be a Krugman-type, nothing is needed. This enables model builders in applied economics to fully enjoy the featured properties of the theoretical models invented by Krugman (1980) and Melitz (2003) in practical policy simulations at low cost.

Behavioral characteristics of applied general equilibrium models with an Armington-Krugman-Melitz encompassing module

This paper explore how simulation results change with different choice of trade specification, and the strength of preference for traded variety by economic agent differs, utilizing two types of three-region, three-sector AGE model that includes the Armington-Krugman-Melitz Encompassing module based on Dixon and Rimmer (2012). Simulation experiments reveal that: (1) the Melitz-type specification does not always enhance effectiveness of a certain policy change more than the one obtained with the Krugman-type, especially when economic agents' preference for traded variety is not so strong; (2) there are likely to be points where the volumes of effects obtained with the Melitz-type exceed the ones with the Krugman-type; and (3) the preference of the producers, those who are in the sectors that exhibit increasing returns to scale, for traded variety might be the engine of explosive effects as suggested by Fujita, et al. (2000).

Simulation analysis of the EU ELV/RoHS directives based on an applied general equilibrium model with Melitz-type trade specification

This paper explores the potential usefulness of an AGE model with the Melitz-type trade specification to assess economic effects of technical regulations, taking the case of the EU ELV/RoHS directives as an example. Simulation experiments reveal that: (1) raising the fixed exporting cost to make sales in the EU market brings results that exports of the targeted commodities (motor vehicles and parts for ELV and electronic equipment for RoHS) to the EU from outside regions/countries expand while the domestic trade in the EU shrinks when the importer's preference for variety (PfV) is not strong; (2) if the PfV is not strong, policy changes that may bring reduction in the number of firms enable survived producers with high productivity to expand production to be large-scale mass producers fully enjoying the fruit of economies of scale; and (3) When the strength of the importer's PfV is changed from zero to unity, there is the value that totally changes simulation results and their interpretations.

Chapter 2 Equilibrium locations of upstream and downstream firms

This paper explores the interaction between upstream firms and downstream firms in a two-region general equilibrium model. In many countries, lower tariff rates are set for intermediate manufactured goods and higher tariff rates are set for final manufactured goods. The derived results imply that such settings of tariff rates tend to preserve a symmetric spread of upstream and downstream firms, and continuing tariff reduction may cause core-periphery structures. In the case in which the circular causality between upstream and downstream firms is focused as agglomeration forces, the present model is fully solved. Thus, we find that (1) the present model displays, at most, three interior steady states, (2) when the asymmetric steady-states exist, they are unstable and (3) location displays hysteresis when the transport costs of intermediate manufactured goods are sufficiently high.

Spatial price equilibrium and the transport sector : a trade-consistent SCGE model

This paper presents a framework for an SCGE model that is compatible with the Armington assumption and explicitly considers transport activities. In the model, the trade coefficient takes the form of a potential function,and the equilibrium market price becomes similar to the price index of varietal goods in the context of new economic geography (NEG). The features of the model are investigated by using the minimal setting, which comprises two non-transport sectors and three regions. Because transport costs are given exogenously to facilitate study of their impacts, commodity prices are also determined relative to them. The model can be described as a system of homogeneous equations, where an output in one region can arbitrarily be determined similarly as a price in the Walrasian equilibrium. The model closure is sensitive to formulation consistency so that homogeneity of the system would be lost by use of an alternative form of trade coefficients.

An Economic Derivation on Trade Coefficients under the Framework of Multi-regional I-O Analysis

The gravity model, entropy model, potential type model and others like these have been adopted to formulate interregional trade coefficients under the framework of Multi-Regional I-O (MRIO) analysis. Since most of these models are based upon analogies in physics or on statistical principles, they do not provide a theoretical explanation from the view of a firm's or individual's rational and deterministic decision making. In this paper, according to the deterministic choice theory, not only is an alternative formulation of the trade coefficients presented, but also a discussion of an appropriate definition for purchasing prices indices. Since this formulation is consistent with the MRIO system, it can be employed as a useful model-building tool in multi-regional models such as the spatial CGE model.

Frontiers of the New Economic Geography

This paper presents an overview of recent development in the new economic geography (NEG), and discusses possible directions of its future development. Since there already exist several surveys on this topic, we focus on the selected features of the NEG which are important yet have attracted insufficient attention, and also on the recent refinements and extensions of the framework.

On the Evolution of the Spatial Economy with Multi-unit/Multi-plant Firms: The Impact of IT Development

This paper examines how the decline of communication costs between management and production facilities within firms and the decrease in trade costs of manufactured goods affect the spatial organization of a two-region economy with multi-unit/multi-plant firms. The development of information technology decreases the costs of communication and trade costs. Thus, the fragmentation of firms is promoted. Our result indicates that, with decreasing communication costs, firms producing low trade-cost products (such as consumer electronics) tend to concentrate their manufacturing plants in low wage countries. In contrast, firms producing high trade-cost products (such as automobiles) tend to have multiple plants serving to segmented markets, even in the absence of wage differentials.

Globalization and the Evolution of the Supply Chain: who gains and who loses?

This paper focuses on two distinct facets of globalization: the decrease in the trade costs of goods and the decline of communication costs between headquarters and production facilities within firms. When the unskilled have about the same wage in the two regions, the decrease of these costs fosters the gradual agglomeration of plants in the core region accommodating the headquarters. By contrast, when the wage gap is significant, the process of integration eventually triggers the re-location of plants into the periphery. In particular, when the process of re-location is driven by falling communication costs, the welfare of all workers living in the core goes down whereas the welfare of those who reside in the periphery rises.

Transport Sector and Regional Price Differentials: A SCGE Model for Chinese Provinces

With regression formulas replaced by equilibrium conditions, a spatial CGE model can substantially reduce data requirements. Detailed regional analyses are thus possible in countries where only limited regional statistics are available. While regional price differentials play important roles in multi-regional settings, transport does not receive much attention in existing models. This paper formulates a spatial CGE model that explicitly considers the transport sector and FOB/CIF prices. After describing the model, performance of our model is evaluated by comparing the benchmark equilibrium for China with survey-based regional I-O and interregional I-O tables for 1987. The structure of Chinese economies is summarized using information obtained from the benchmark equilibrium computation. This includes regional and sectoral production distributions and price differentials. The equilibrium for 1997 facilitates discussion of changes in regional economic structures that China has experienced in the decade.

Is It Worthwhile for Indonesia to Rush into a Free Trade Deal with Japan?

This report represents a preliminary attempt to refine some basic ideas on the potential impact Indonesia might experience from a free trade arrangement with Japan, using a forward-looking, multi-regional, multi-sectoral applied general equilibrium model of global trade to capture growth effects through capital accumulation paying attention to the changes in the patterns of interregional capital flows that might happen even before the policy change occurs. The simulation results revealed that the welfare gains of rushing into trade liberalization with Japan are not so large. This makes out that taking time over negotiations might be the best choice for Indonesia if the government places priority on convincing the Indonesian people that a free trade deal with Japan will definitely bring positive effects, while proceeding rapidly might be the answer if the country is serious about recovering the welfare levels that might be lowered by free trade arrangements among Malaysia, the Philippines, and Japan.

Monetary Policy Effects in Developing Countries with Minimum Wages

Using a Dynamic General Equilibrium (DGE) model, this study examines the effects of monetary policy in economies where minimum wages are bound. The findings show that the monetary-policy effect on a binding-minimum-wage economy is relatively small and quite persistent. This result suggests that these two characteristics of monetary policy in the minimum-wage model are rather different from those in the union-negotiation model which is often assumed to account for industrial economies.

Trade Coefficients and the Role of Elasticity in a Spatial CGE Model Based on the Armington Assumption

The Armington Assumption in the context of multi-regional CGE models is commonly interpreted as follows: Same commodities with different origins are imperfect substitutes for each other. In this paper, a static spatial CGE model that is compatible with this assumption and explicitly considers the transport sector and regional price differentials is formulated. Trade coefficients, which are derived endogenously from the optimization behaviors of firms and households, are shown to take the form of a potential function. To investigate how the elasticity of substitutions affects equilibrium solutions, a simpler version of the model that incorporates three regions and two sectors (besides the transport sector) is introduced. Results indicate: (1) if commodities produced in different regions are perfect substitutes, regional economies will be either autarkic or completely symmetric and (2) if they are imperfect substitutes, the impact of elasticity on the price equilibrium system as well as trade coefficients will be nonlinear and sometimes very sensitive.