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Trade based on economies of scale under monopolistic competition: a clarification of Krugman's model

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  • Emanuel R. Leão
  • Pedro R. Leão

Abstract

Although a major contribution to trade theory, Krugman’s 1979 demonstration that ‘trade can arise and lead to mutual gains even when countries are similar’ fails to make explicit the economic mechanisms that lead up to this result. The current paper attempts to fill this gap by addressing several questions that are implicit in Krugman’s demonstration but which he does not explicitly analyze: - What is the effect of trade upon the demand curve faced by the typical firm in each nation? - How do firms react to the change in the demand curves they face, and what is the short-term outcome of their behaviour? - Why do some firms fail? - What is the role of the failure of firms in the adjustment to the final free trade equilibrium?

Suggested Citation

  • Emanuel R. Leão & Pedro R. Leão, 2009. "Trade based on economies of scale under monopolistic competition: a clarification of Krugman's model," Working Papers Department of Economics 2009/10, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
  • Handle: RePEc:ise:isegwp:wp102009
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    More about this item

    Keywords

    Krugman; intra-industry trade; economies of scale; monopolistic competition.;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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