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Together at Last: Trade Costs, Demand Structure, and Welfare

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  • Peter Neary
  • Monika Mrazova

Abstract

We show that relaxing the assumption of CES preferences in monopolistic competition has surprising implications when trade is restricted.� Integrated and segmented markets behave differently, the latter typically exhibiting reciprocal dumping.� Globalization and lower trade costs have different effects: the former reduces spending on all existing varieties, the latter switches spending from home to imported varieties; when demands are less convex than CES, globalization raises whereas lower trade costs reduce firm output.� Finally,calibrating gains from trade is harder.� Many more parameters are needed, while import demand elasticities typically overestimate the true elasticities, and so underestimate the gains from trade.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 694.

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Date of creation: 20 Jan 2014
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Handle: RePEc:oxf:wpaper:694

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Keywords: Additively Separable Preference; CES Preference; Iceberg Trade Costs; Quantifying Gains from Trade; Super- and Subconvexity of Demand; Super- and Subconcavity of Utility;

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  1. Robert C. Feenstra & David E. Weinstein, 2010. "Globalization, Markups and U.S. Welfare," NBER Working Papers 15749, National Bureau of Economic Research, Inc.
  2. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  3. Novy, Dennis, 2012. "International Trade without CES: Estimating Translog Gravity," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 101, Competitive Advantage in the Global Economy (CAGE).
  4. Marc J. Melitz & Stephen J. Redding, 2013. "Firm heterogeneity and aggregate welfare," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 51533, London School of Economics and Political Science, LSE Library.
  5. Paolo Bertoletti & Paolo Epifani, 2012. "Monopolistic Competition: CES Redux?," DEM Working Papers Series 004, University of Pavia, Department of Economics and Management.
  6. Mrázová, Monika & Neary, J Peter, 2013. "Selection Effects With Heterogeneous Firms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9288, C.E.P.R. Discussion Papers.
  7. Ralph Ossa, 2012. "Why Trade Matters After All," NBER Working Papers 18113, National Bureau of Economic Research, Inc.
  8. ZHELOBODKO, Evgeny & KOKOVIN, Sergey & Parenti, Mathieu & THISSE, Jacques-François, . "Monopolistic competition beyond the constant elasticity of substitution," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2488, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Simonovska, Ina & Waugh, Michael E., 2014. "The elasticity of trade: Estimates and evidence," Journal of International Economics, Elsevier, Elsevier, vol. 92(1), pages 34-50.
  10. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 950-59, December.
  11. Swati Dhingra & John Morrow, 2012. "The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition," FIW Working Paper series, FIW 088, FIW.
  12. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, Elsevier, vol. 9(4), pages 469-479, November.
  13. Pollak, Robert A, 1971. "Additive Utility Functions and Linear Engel Curves," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(116), pages 401-14, October.
  14. Ina Simonovska, 2010. "Income Differences and Prices of Tradables: Insights from an Online Retailer," NBER Working Papers 16233, National Bureau of Economic Research, Inc.
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Cited by:
  1. Igor A. Bykadorov & Alexey A. Gorn & Sergey G. Kokovin & Evgeny V. Zhelobodko, 2014. "Losses From Trade In Krugman’s Model: Almost Impossible," HSE Working papers, National Research University Higher School of Economics WP BRP 61/EC/2014, National Research University Higher School of Economics.

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