Handbook of International Economics

Chapter 1

Heterogeneous Firms and Trade*

Marc J. Melitz^{a, b, c} and Stephen J. Redding^{b, c, d},    ^aHarvard University, Cambridge, MA, USA, ^bNational Bureau of Economic Research, Cambridge, MA, USA, ^cCentre for Economic Policy Research, London, UK, ^dPrinceton University, Princeton, NJ, USA

Abstract

This chapter reviews the new approach to international trade based on firm heterogeneity in differentiated product markets. This approach explains a variety of features exhibited in disaggregated trade data, including the higher productivity of exporters relative to non-exporters, within-industry reallocations of resources following trade liberalization, and patterns of trade participation across firms and destination markets. Accounting for these ...