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Trade Liberalisation and Agglomeration with Firm Heterogeneity - Forward and Backward Linkages

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    Abstract

    This paper studies the impact of trade costs reduction on geographical concentration in the presence of firm heterogeneity and overhead type of export fixed costs. Firm heterogeneity with the export fixed costs hampers full agglomeration through weakening the forward and backward linkages and fortifying the market crowding effect. Rather than catastrophic agglomeration that the standard new economic geography models have long suggested, trade liberalisation causes gradual agglomeration. Also, trade liberalisation never produces a perfect convergence in welfare for the periphery, which loses, and the core, which gains. Even free trade never equalises the welfare between core and periphery, i.e. trade liberalisation does not eliminate inequality among nations.

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    File URL: http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIWP17-2006.pdf
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    Bibliographic Info

    Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 17-2006.

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    Length: 30 pages
    Date of creation: Apr 2006
    Date of revision:
    Handle: RePEc:gii:giihei:heiwp16-2006

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    Keywords: heterogeneous firms; economic geography; spatial sorting effect; non-full agglomeration; non-catastrophic agglomeration; trade liberalisation.;

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