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

  • Mrázová, Monika
  • Neary, J Peter

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

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9839.

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Date of creation: Feb 2014
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Handle: RePEc:cpr:ceprdp:9839
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  1. Monika Mrázová & J. Peter Neary, 2012. "Selection Effects with Heterogeneous Firms," CEP Discussion Papers dp1174, Centre for Economic Performance, LSE.
  2. Novy, Dennis, 2010. "International Trade without CES: Estimating Translog Gravity," CAGE Online Working Paper Series 32, Competitive Advantage in the Global Economy (CAGE).
  3. Marc J. Melitz & Stephen J. Redding, 2013. "Firm Heterogeneity and Aggregate Welfare," Sciences Po Economics Discussion Papers 2013-11, Sciences Po Departement of Economics.
  4. Ralph Ossa, 2012. "Why Trade Matters After All," NBER Working Papers 18113, National Bureau of Economic Research, Inc.
  5. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
  6. Ina Simonovska, 2010. "Income Differences and Prices of Tradables: Insights from an Online Retailer," NBER Working Papers 16233, National Bureau of Economic Research, Inc.
  7. Arnaud Costinot & Andres Rodriguez-Clare & Costas Arkolakis, 2010. "New Trade Models, Same Old Gains?," 2010 Meeting Papers 433, Society for Economic Dynamics.
  8. Robert C. Feenstra & David E. Weinstein, 2010. "Globalization, Markups and U.S. Welfare," NBER Working Papers 15749, National Bureau of Economic Research, Inc.
  9. Bertoletti, Paolo & Epifani, Paolo, 2014. "Monopolistic competition: CES redux?," Journal of International Economics, Elsevier, vol. 93(2), pages 227-238.
  10. 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.
  11. Pollak, Robert A, 1971. "Additive Utility Functions and Linear Engel Curves," Review of Economic Studies, Wiley Blackwell, vol. 38(116), pages 401-14, October.
  12. Ina Simonovska & Michael Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," Working Papers 112, University of California, Davis, Department of Economics.
  13. Dennis Novy, 2013. "International trade without CES: estimating translog gravity," LSE Research Online Documents on Economics 57367, London School of Economics and Political Science, LSE Library.
  14. Swati Dhingra & John Morrow, 2012. "The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition," CEP Discussion Papers dp1130, Centre for Economic Performance, LSE.
  15. 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.
  16. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
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