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How Strong is the Love of Variety?

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  • Ardelean, Adina

Abstract

Models with monopolistic competition and constant elasticity of substitution (CES) preferences have become a mainstay of theoretical and empirical work in international trade. However, the standard model yields contrafactual predictions on the number of varieties, prices and output per variety that are traded. In particular the model predicts a rate of variety growth that is faster than that observed in the data. This paper develops and tests a model with a more general, but still tractable, CES preference structure that nests Krugman (1980) and Armington (1969) style models. With limited love of variety the consumer faces a trade-off between buying more varieties or higher quantities per variety and in equilibrium the model yields a variety growth rate consistent with the data. The empirics confirm that consumer’s “love of variety” is 42 percent lower than is assumed in Krugman’s model. One implication is that existing studies overstate the variety gains from trade liberalization. Another is that the impact of product variety on economic growth and the strength of industrial agglomerations is smaller than is typically assumed.

Suggested Citation

  • Ardelean, Adina, 2007. "How Strong is the Love of Variety?," Conference papers 331580, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331580
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    File URL: https://ageconsearch.umn.edu/record/331580/files/3314.pdf
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    References listed on IDEAS

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    1. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-1125, December.
    2. Cheung, Yin-Wong & Chinn, Menzie D. & Pascual, Antonio Garcia, 2005. "Empirical exchange rate models of the nineties: Are any fit to survive?," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1150-1175, November.
    3. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
    4. Harrigan, James, 2010. "Airplanes and comparative advantage," Journal of International Economics, Elsevier, vol. 82(2), pages 181-194, November.
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    Cited by:

    1. Felbermayr, Gabriel & Prat, Julien & Schmerer, Hans-Jörg, 2011. "Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity," Journal of Economic Theory, Elsevier, vol. 146(1), pages 39-73, January.
    2. Gabriel Felbermayr & Benjamin Jung, 2011. "Sorting It Out: Technical Barriers to Trade and Industry Productivity," Open Economies Review, Springer, vol. 22(1), pages 93-117, February.

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