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Trade liberalization by less developed countries with a large market size: Meager welfare gains?

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  • Cristóbal Campoamor, Adolfo

Abstract

In this paper we present a one-sector Dixit-Stiglitz-Krugman model of North-South trade, in order to evaluate the welfare and convergence implications of a gradual, bilateral trade liberalization. Using the same formal setting that generated the “new trade theory” wave, we show that a technologically disadvantaged South may diverge in welfare terms with the North, provided that its population and market size were large enough. Both countries are shown to benefit from trade in absolute terms. The causality mechanism deals with a home-market effect, which reinforces the potential exports of the largest economy, and a simultaneous terms-of-trade effect, which preserves trade balance by reducing the relative prices and wage rate of the largest and poorest country.

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  • Cristóbal Campoamor, Adolfo, 2025. "Trade liberalization by less developed countries with a large market size: Meager welfare gains?," Economics Letters, Elsevier, vol. 248(C).
    • Handle: RePEc:eee:ecolet:v:248:y:2025:i:c:s0165176525000771
    DOI: 10.1016/j.econlet.2025.112240
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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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