consistent with the earlier result we saw in table 3, where with labor-leisure choice the availability of more resources led to more varieties and more gains in the monopolistic competition models.

The values of our parameter _RK_ / _M_ for the Krugman model’s share of the larger welfare gains in the Melitz model over the Armington model in the four sets of scenarios are: .83; .83; .83; .82. Again, we observe that, for these global changes in iceberg costs, the selection effect contributes to additional welfare gains, but the variety impact of the Krugman model is quantitatively more important than the selection effect of the Melitz model.

# **5.5. Tariff and Iceberg Trade Costs Reduction in a Nine-sector, Ten Region Model**

In this subsection, we compare the welfare effects in the Armington, Krugman and Melitz models of global free trade in a more realistic model structure. We incorporate initial tariffs based on the data for the first time, and, as in the models of tables 3-5, we have initial trade imbalances. We expand our models to nine-sectors, four of which are always modeled as perfectly competitive Armington sectors, and five of which are modeled as monopolistically competitive when we evaluate the Krugman and Melitz models.<sup>21</sup> All versions of these models contain Cobb-Douglas demand for three primary factors of production: labor, capital and a resource factor. We allow some of the resource factor to be sector specific factor in all of these models. We assume CES demand for intermediates based on the data on intermediate shares by sector with an elasticity of substitution equal to 0.5. We also evaluate the impact of uniform tariffs and labor-leisure choice. For sensitivity purposes with the earlier simulations, we evaluate and compare a reduction in iceberg trade costs in this model. We continue to hold the trade response constant across the three market structures.

## **5.5.1 Global Free Trade in Tariffs**

We evaluate a movement to global free trade in three model variants: (i) initial tariffs based on the data; (ii) initial uniform tariffs in each country where the uniform tariff rate equalizes the revenue for initial tariffs based on the data; and (iii) initial tariffs based on the data with labor-leisure choice. Focusing first on the results for the average for the world, in all three model variants we again have the ranking of welfare results as _M K A_ **.** <!-- Start of picture text --> K A .<br><!-- End of picture text --> When we start with initial uniform tariffs and move to global free trade, we see that the gains in the Armington model drop to very small gains—to about .05% of consumption from .24% of consumption with initial tariffs based on the data. The lower gains with uniform tariffs in the Armington

> 21 We aggregate the 57 sectors of the GTAP database into the following sectors (the first four of which are always perfectly competitive sectors in this subsection): (i) agriculture; (ii) natural resources extraction; (iii) utilities; (iv) all other services, not included elsewhere; (v) food; (vi) textiles; (vii) refined resource products; (viii) other manufacturing, not elsewhere classified; and (ix) business services.

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