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Royale with cheese : the effect of globalization on the variety of goods

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  • Matthew T. Cole
  • Ronald B. Davies

Abstract

The key result of the so-called “New Trade Theory” is that countries gain from falling trade costs by an increase in the number of varieties available to consumers. Though the number of varieties in a given country rises, it is also true that global variety decreases from increased competition wherein imported varieties drive out some local varieties. This second result is a major issue for anti-trade activists who criticize the move towards free trade as promoting “homogenization” or “Americanization” of varieties across countries. We present a model of endogenous entry with heterogeneous firms which models this concern in two ways: a portion of a consumer’s income is spent overseas (i.e. tourism) and an existence value (a common tool in environmental economics where simply knowing that a species exists provides utility). Since lowering trade costs induces additional varieties to export and drives out some non-exported varieties, these modifications result in welfare losses not accounted for in the existing literature. Nevertheless, it is only through the existence value that welfare can fall as a result of declining trade barriers. Thus, for these criticisms of globalization to dominate, it must be that this loss in the existence value outweighs the direct benefits from consumption.

Suggested Citation

  • Matthew T. Cole & Ronald B. Davies, 2010. "Royale with cheese : the effect of globalization on the variety of goods," Working Papers 201024, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:201024
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    File URL: http://hdl.handle.net/10197/2657
    File Function: First version, 2010
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    Cited by:

    1. Jan Jørgensen & Philipp Schröder & Zhihao Yu, 2012. "Globalization beyond partitioning: back to Krugman’s world," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(1), pages 73-87, April.

    More about this item

    Keywords

    Trade theory; Globalization; Variety; Tourism;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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