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Royale with Cheese: The Effect of Globalization on the Variety of Goods

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  • Matthew T. Cole

    ()

  • Ronald B. Davies

    ()
    (University College Dublin; Institute for International Integration Studies, Trinity College Dublin)

Abstract

The key result of the so-called “New Trade Theory” is that countries gain from falling trade costs by an increase in the number of varieties available to consumers. Though the number of varieties in a given country rises, it is also true that global variety decreases from increased competition wherein imported varieties drive out some local varieties. This second result is a major issue for anti-trade activists who criticize the move towards free trade as promoting homogenization” or “Americanization” of varieties across countries. We present a model of endogenous entry with heterogeneous firms which models this concern in two ways: a portion of a consumer’s income is spent overseas (i.e. tourism) and an existence value (a common tool in environmental economics where simply knowing that a species exists provides utility). Since lowering trade costs induces additional varieties to export and drives out some non-exported varieties, these modifications result in welfare losses not accounted for in the existing literature. Nevertheless, it is only through the existence value that welfare can fall as a result of declining trade barriers. Thus, for these criticisms of globalization to dominate, it must be that this loss in the existence value outweighs the direct benefits from consumption.

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Bibliographic Info

Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp329.

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Length: 21 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:iis:dispap:iiisdp329

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Keywords: firm heterogeneity; tourism;

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Cited by:
  1. Jan Jørgensen & Philipp Schröder & Zhihao Yu, 2012. "Globalization beyond partitioning: back to Krugman’s world," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 148(1), pages 73-87, April.

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