We study a flexible class of trade models with international production networks and arbitrary wedge‐like distortions like markups, tariffs, or nominal rigidities. We characterize the general equilibrium response of variables to shocks in terms of microeconomic statistics. Our results are useful for decomposing the sources of real GDP and welfare growth, and for computing counterfactuals. Using the same set of microeconomic sufficient statistics, we also characterize societal losses from increases in tariffs and iceberg trade costs and dissect the qualitative and quantitative importance of accounting for disaggregated details. Our results, which can be used to compute approximate and exact counterfactuals, provide an analytical toolbox for studying large‐scale trade models and help to bridge the gap between computation and theory.

Abstract How does an increase in market size, say due to globalization, affect welfare? We study this question using a model with monopolistic competition, heterogeneous markups, and fixed costs. We characterize changes in welfare and decompose changes in allocative efficiency into three different effects: (1) reallocations across firms with heterogeneous price elasticities due to intensifying competition, (2) reallocations due to the exit of marginally profitable firms, and (3) reallocations due to changes in firms’ markups. Whereas the second and third effects have ambiguous implications for welfare, the first effect, which we call the Darwinian effect, always increases welfare regardless of the shape of demand curves. We nonparametrically calibrate demand curves with data from Belgian manufacturing firms and quantify our results. We find that mild increasing returns at the microlevel can catalyze large increasing returns at the macrolevel. Between 70 and 90% of increasing returns to scale come from improvements in how a larger market allocates resources. The lion’s share of these gains are due to the Darwinian effect, which increases the aggregate markup and concentrates sales and employment in high-markup firms. This has implications for policy: an entry subsidy, which harnesses Darwinian reallocations, can improve welfare even when there is more entry than in the first best.