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

Author

Listed:
  • Peter Neary
  • Monika Mrazova

Abstract

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.

Suggested Citation

  • Peter Neary & Monika Mrazova, 2014. "Together at Last: Trade Costs, Demand Structure, and Welfare," Economics Series Working Papers 694, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:694
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    File URL: http://www.economics.ox.ac.uk/materials/papers/13219/paper694.pdf
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    References listed on IDEAS

    as
    1. Melitz, Marc J & Redding, Stephen J., 2013. "Firm Heterogeneity and Aggregate Welfare," CEPR Discussion Papers 9405, C.E.P.R. Discussion Papers.
    2. Novy, Dennis, 2013. "International trade without CES: Estimating translog gravity," Journal of International Economics, Elsevier, vol. 89(2), pages 271-282.
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    5. Peter Neary & Monika Mrazova, 2011. "Selection Effects with Heterogeneous Firms," Economics Series Working Papers 588, University of Oxford, Department of Economics.
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    16. repec:cor:louvrp:-2488 is not listed on IDEAS
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    Cited by:

    1. Wang, Xichao & Gibson, Mark J., 2015. "Trade, non-homothetic preferences, and the impact of country size on wages," Economics Letters, Elsevier, vol. 132(C), pages 121-124.
    2. Ligon, Ethan, 2016. "Some $\lambda$-separable Frisch demands with utility functions," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt1s06c2zp, Department of Agricultural & Resource Economics, UC Berkeley.
    3. Marco Bee & Stefano Schiavo, 2018. "Powerless: gains from trade when firm productivity is not Pareto distributed," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 15-45, February.
    4. Andrei Matveenko, 2017. "Logit, CES, and Rational Inattention," CERGE-EI Working Papers wp593, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    5. repec:aea:aecrev:v:107:y:2017:i:12:p:3835-74 is not listed on IDEAS
    6. Igor A. Bykadorov & Alexey A. Gorn & Sergey G. Kokovin & Evgeny V. Zhelobodko, 2014. "Losses From Trade In Krugman’s Model: Almost Impossible," HSE Working papers WP BRP 61/EC/2014, National Research University Higher School of Economics.
    7. Monika Mrázová & J. Peter Neary, 2017. "Not So Demanding: Demand Structure and Firm Behavior," American Economic Review, American Economic Association, vol. 107(12), pages 3835-3874, December.
    8. Abbassi, Abdessalem & Tamini, Lota D. & Dakhlaoui, Ahlem, 2015. "Import quota allocation between regions under Cournot competition," Economic Modelling, Elsevier, vol. 51(C), pages 484-490.
    9. repec:kap:enreec:v:70:y:2018:i:1:d:10.1007_s10640-017-0110-2 is not listed on IDEAS
    10. Stark, Oded & Zawojska, Ewa & Kohler, Wilhelm & Szczygielski, Krzysztof, 2018. "An adverse social welfare effect of a doubly gainful trade," University of Tuebingen Working Papers in Economics and Finance 106, University of Tuebingen, Faculty of Economics and Social Sciences.
    11. Bykadorov, Igor & Gorn, Alexey & Kokovin, Sergey & Zhelobodko, Evgeny, 2015. "Why are losses from trade unlikely?," Economics Letters, Elsevier, vol. 129(C), pages 35-38.
    12. Lota Dabio Tamini & Sorgho Zakaria, 2016. "Trade in environmental goods: how important are trade costs elasticities?," Cahiers de recherche CREATE 2016-3, CREATE.

    More about this item

    Keywords

    Additively Separable Preference; CES Preference; Iceberg Trade Costs; Quantifying Gains from Trade; Super- and Subconvexity of Demand; Super- and Subconcavity of Utility;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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