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Is Small Beautiful? Trade Shares and Trade Creation with Differentiated Products

  • Denise Eby Konan


    (Department of Economics, University of Hawaii at Manoa)

  • Keith Maskus

In a small open economy model where imports (exports) are differentiated by region of origin (destination), the welfare effects of a preferential trade agreement (PTA) are considered. Trade creation is found to be a concave function of pre-union partner trade shares. This contrasts with earlier results in the homogeneous goods case whereby the smaller the pre-PTA volume of trade with a potential partner the smaller is trade diversion and the more beneficial is a PTA. An applied general equilibrium model of Egypt demonstrates the theoretical findings for a PTA with the European Union. As Egypt's trading patterns are not heavily focused on the EU, gains from a PTA would likely be modest.

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Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 199706.

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Length: 33 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:hai:wpaper:199706
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