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Foreign technological advance unambiguously reduces home welfare in a popular variant of the Melitz (Econometrica 71(6):1695–1725, 2003) model that assumes the presence of a costlessly traded homogeneous (outside) good (Demidova in Int Econ Rev 49(4):1437–1462, 2008). The present paper shows that this result is sensitive to the presence of the outside good and is, in fact, reversed in its absence: foreign technological advance always improves home welfare in the Melitz model without the outside good. Improvement in home welfare occurs via changes in the numbers and prices of domestic and imported varieties. For quantitative analysis of welfare effects, we calibrate an international trade model for the United States and its major trading partners. US is found to gain less from foreign technological improvements than its trading partners from US improvements. In either case, the magnitude of gains is modest.

Nontraded goods account for a major share of GDP in most economies, but have not been incorporated in the welfare analysis of monopolistic-competition models with heterogeneous productivity. This paper extends Helpman, Melitz and Yeaple (American Economic Review 94(1):300–316, 2004) to explore welfare effects in the presence of a nontraded good. We derive new analytical results about how the gains from trade and FDI are determined and affected by key parameters in the case of symmetric countries. The model is calibrated to a country group that includes all major developed countries. The gains from openness (trade and FDI) are found to be substantial (between 3.24 and 6.27 per cent of income) even if nontraded goods represent a major part of the economy. Most of these gains are attributed to trade rather than FDI.