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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
Handle: RePEc:cpr:ceprdp:9839
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  1. Marc J. Melitz & Stephen J. Redding, 2013. "Firm Heterogeneity and Aggregate Welfare," CEP Discussion Papers dp1200, Centre for Economic Performance, LSE.
  2. Peter Neary & Monika Mrazova, 2011. "Selection Effects with Heterogeneous Firms," Economics Series Working Papers 588, University of Oxford, Department of Economics.
  3. Evgeny Zhelobodko & Sergey Kokovin & Mathieu Parenti & Jacques Thisse, 2012. "Monopolistic competition: Beyond the constant elasticity of substitution," ULB Institutional Repository 2013/224564, ULB -- Universite Libre de Bruxelles.
  4. Ina Simonovska & Michael E. Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," CESifo Working Paper Series 3356, CESifo Group Munich.
  5. repec:cor:louvrp:-2488 is not listed on IDEAS
  6. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  7. Novy, Dennis, 2012. "International Trade without CES: Estimating Translog Gravity," CAGE Online Working Paper Series 101, Competitive Advantage in the Global Economy (CAGE).
  8. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
  9. Paolo Bertoletti & Paolo Epifani, 2012. "Monopolistic Competition: CES Redux?," DEM Working Papers Series 004, University of Pavia, Department of Economics and Management.
  10. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  11. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
  12. Robert C. Feenstra & David E. Weinstein, 2010. "Globalization, Markups and U.S. Welfare," NBER Working Papers 15749, National Bureau of Economic Research, Inc.
  13. Robert A. Pollak, 1971. "Additive Utility Functions and Linear Engel Curves," Review of Economic Studies, Oxford University Press, vol. 38(4), pages 401-414.
  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. 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).
  16. Ralph Ossa, 2012. "Why Trade Matters After All," NBER Working Papers 18113, National Bureau of Economic Research, Inc.
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