ABSTRACT
This chapter develops a simple model of firm heterogeneity with endogenous markups. It shows how it is still amenable to simple, mostly graphical, comparative statics analyses of asymmetric trade liberalization by applying these to the case of a "small" open economy. Although the preferences are left un-parametrized, they are restricted to a broad class of additively separable preferences that generates predictions for markups under monopolistic competition that are consistent with a large set of established empirical patterns. The effects are described both in a partial equilibrium setting where wages in a given sector are fixed and trade need not be balanced. The chapter emphasizes how these intensive margin reallocations generate a more robust prediction linking globalization to increased aggregate productivity. Note that the impact of opening the economy to imports is very different than the impact of reducing the size of the domestic economy in terms of the number of consumers L.
