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

  • Peter Neary
  • Monika Mrazova

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

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 694.

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Date of creation: 20 Jan 2014
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Handle: RePEc:oxf:wpaper:694
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  1. Ina Simonovska, 2009. "Income Differences and Prices of Tradables," 2009 Meeting Papers 692, Society for Economic Dynamics.
  2. 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.
  3. Paolo Bertoletti & Paolo Epifani, 2012. "Monopolistic Competition: CES Redux?," DEM Working Papers Series 004, University of Pavia, Department of Economics and Management.
  4. Ina Simonovska & Michael E. Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," NBER Working Papers 16796, National Bureau of Economic Research, Inc.
  5. Dennis Novy, 2010. "International Trade without CES: Estimating Translog Gravity," CESifo Working Paper Series 3008, CESifo Group Munich.
  6. Robert C. Feenstra & David E. Weinstein, 2010. "Globalization, Markups and U.S. Welfare," NBER Working Papers 15749, 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. repec:cor:louvrp:-2488 is not listed on IDEAS
  9. Marc J. Melitz & Stephen J. Redding, 2013. "Firm Heterogeneity and Aggregate Welfare," Sciences Po publications 2013-11, Sciences Po.
  10. 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).
  11. ZHELOBODKO, Evgeny & KOKOVIN, Sergey & Parenti, Mathieu & THISSE, Jacques-François, . "Monopolistic competition beyond the constant elasticity of substitution," CORE Discussion Papers RP 2488, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Pollak, Robert A, 1971. "Additive Utility Functions and Linear Engel Curves," Review of Economic Studies, Wiley Blackwell, vol. 38(116), pages 401-14, October.
  13. Monika Mrázová & J. Peter Neary, 2012. "Selection Effects with Heterogeneous Firms," CEP Discussion Papers dp1174, Centre for Economic Performance, LSE.
  14. Ralph Ossa, 2012. "Why Trade Matters After All," NBER Working Papers 18113, National Bureau of Economic Research, Inc.
  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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