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Globalization and Individual Gains from Trade (revised version)

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  • Kristian Behrens
  • Yasusada Murata

Abstract

We analyze the impact of globalization on individual gains from trade in a general equilibrium model of monopolistic competition featuring product diversity, pro-competitive effects and income heterogeneity between and within countries. We show that, although trade reduces markups in both countries, its impact on variety depends on their relative position in the world income distribution: product diversity in the lower income country always expands, while that in the higher income country may shrink. When the latter occurs, the richer consumers in the higher income country may lose from trade because the relative importance of variety versus quantity increases with income. Using data on GDP per capita and population, as well as on the U.S. income distribution, we illustrate our theoretical results in two different contexts: the hypothetical bilateral trade liberalization between the U.S. and 188 countries; and the historical sequence of U.S. free trade agreements since 1985.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1218.

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Date of creation: 2012
Date of revision:
Handle: RePEc:lvl:lacicr:1218

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Keywords: Income heterogeneity; product diversity; pro-competitive effects; general equilibrium; monopolistic competition;

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References

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Cited by:
  1. Pokrovsky Dmitry & Behrens Kristian & Zhelobodko Evgeny, 2014. "Market Size, Entrepreneurship, and Income Inequality," EERC Working Paper Series 14/01e, EERC Research Network, Russia and CIS.

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