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

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Author Info

  • Matthew T Cole

    (University College Dublin)

  • Ronald B Davies

    (University 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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File URL: http://www.ucd.ie/t4cms/wp10_24.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 201024.

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Length: 22 Pages
Date of creation: 19 Jul 2010
Date of revision:
Handle: RePEc:ucn:wpaper:201024

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Keywords: Trade Theory; Globalization; Variety; 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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