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

  • Monika Mr?zov?
  • J. Peter Neary

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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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 104 (2014)
Issue (Month): 5 (May)
Pages: 298-303

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Handle: RePEc:aea:aecrev:v:104:y:2014:i:5:p:298-303
Note: DOI: 10.1257/aer.104.5.298
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  1. Ina Simonovska & Michael E. Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," NBER Working Papers 16796, National Bureau of Economic Research, Inc.
  2. Bertoletti, Paolo & Epifani, Paolo, 2014. "Monopolistic competition: CES redux?," Journal of International Economics, Elsevier, vol. 93(2), pages 227-238.
  3. Mrázová, Monika & Neary, J Peter, 2013. "Selection Effects With Heterogeneous Firms," CEPR Discussion Papers 9288, C.E.P.R. Discussion Papers.
  4. Ina Simonovska, 2010. "Income Differences and Prices of Tradables: Insights from an Online Retailer," NBER Working Papers 16233, National Bureau of Economic Research, Inc.
  5. Novy, Dennis, 2013. "International trade without CES: Estimating translog gravity," Journal of International Economics, Elsevier, vol. 89(2), pages 271-282.
  6. Robert C. Feenstra & David E. Weinstein, 2010. "Globalization, Markups and U.S. Welfare," NBER Working Papers 15749, National Bureau of Economic Research, Inc.
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  8. Marc J. Melitz & Stephen J. Redding, 2013. "Firm Heterogeneity and Aggregate Welfare," Sciences Po publications 2013-11, Sciences Po.
  9. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  10. repec:cor:louvrp:-2488 is not listed on IDEAS
  11. Evgeny Zhelobodko & Sergey Kokovin & Mathieu Parenti & Jacques‐François Thisse, 2012. "Monopolistic Competition: Beyond the Constant Elasticity of Substitution," Econometrica, Econometric Society, vol. 80(6), pages 2765-2784, November.
  12. Ina Simonovska, 2011. "Income Differences and Prices of Tradables," Working Papers 1015, University of California, Davis, Department of Economics.
  13. Simonovska, Ina; Waugh, Michael E., 2010. "The Elasticity of Trade: Estimates & Evidence," CAGE Online Working Paper Series 13, Competitive Advantage in the Global Economy (CAGE).
  14. Ralph Ossa, 2012. "Why Trade Matters After All," NBER Working Papers 18113, National Bureau of Economic Research, Inc.
  15. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  16. Robert A. Pollak, 1971. "Additive Utility Functions and Linear Engel Curves," Review of Economic Studies, Oxford University Press, vol. 38(4), pages 401-414.
  17. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
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