The Review Of Heterogeneous Firm Modeling

The traditional trade theory and the new trade theory regard industry as a research unit, and homogeneous firms are assumed. In recent years such as.Melitz (2003), Bernard, Eaton, Jensen and Kortum (2003), they built an industry model with heterogeneous firm to explain why international trade induced the reallocation of resources among firms in an industry, and put forward the hetero-geneous firm trade model. The heterogeneous firm trade model addresses some firm-level trade phenomena.Melitz (2003) adapts Hopenhayn’s (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, it provides an extension of Krugman’s (1980) trade model that incorporates firm level productivity differences. Melitz (2003) builds a dynamic industry model with heterogeneous firms that explains why international trade induces reallocations of resources among firms in an industry. It shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry’s exposure to trade lead to additional inter-firm reallocations towards more productive firms. These phenomena have been empirically documented but cannot be explained by current general equilibrium trade models, because they rely on a representative firm framework. Melitz (2003) also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before.This paper mainly discusses heterogeneous firm trade model from the following four aspects:first, the detailed description of the modeling process of heterogeneous firm trade model; second, combined with heterogeneous firm trade model, it explains the impact of trade and trade liberalization; furthermore, it summarizes the conclusions of heterogeneous firm trade model, pointing out the limitations that may exist; last, it introduces the contribution of heterogeneous firm trade model and the revelation of our economic development.