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Trade, product variety and welfare: A quantitative assessment for the transition economies in Central and Eastern Europe


  • Michael Funke

    (Hamburg University Department of Economics)

  • Ralf Ruhwedel

    (Hamburg University Department of Economics)


We calculate welfare gains of trade liberalization in the Central and East European transition economies, following the approach of Romer (1994), who emphasized that proper modeling of the impact of trade restrictions on the number of available product varieties is crucial to quantifying the welfare impact of trade liberalization. The empirical work relies on direct measures of product variety calculated from 5- digit trade data. Although the issue is far from settled, the emerging conclusion is that freer trade has boosted welfare.

Suggested Citation

  • Michael Funke & Ralf Ruhwedel, 2004. "Trade, product variety and welfare: A quantitative assessment for the transition economies in Central and Eastern Europe," Macroeconomics 0401016, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0401016 Note: Type of Document - ; pages: 24; figures: included

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    References listed on IDEAS

    1. By Michael Funke & Ralf Ruhwedel, 2001. "Product Variety and Economic Growth: Empirical Evidence for the OECD Countries," IMF Staff Papers, Palgrave Macmillan, vol. 48(2), pages 1-1.
    2. Feenstra, Robert C., 1995. "Estimating the effects of trade policy," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 30, pages 1553-1595 Elsevier.
    3. Harris, Richard, 1984. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," American Economic Review, American Economic Association, vol. 74(5), pages 1016-1032, December.
    4. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    5. Romer, Paul, 1994. "New goods, old theory, and the welfare costs of trade restrictions," Journal of Development Economics, Elsevier, vol. 43(1), pages 5-38, February.
    6. Rutherford, Thomas F. & Tarr, David G., 1998. "Trade liberalization and endogenous growth in a small open economy : a quantitative assessment," Policy Research Working Paper Series 1970, The World Bank.
    7. Hoekman, Bernard & Djankov, Simeon, 1997. "Determinants of the Export Structure of Countries in Central and Eastern Europe," World Bank Economic Review, World Bank Group, vol. 11(3), pages 471-487, September.
    8. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
    9. Michael Funke & Ralf Ruhwedel, 2005. "Export variety and economic growth in East European transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(1), pages 25-50, January.
    10. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
    11. Qing Wang, 2001. "Import-Reducing Effect of Trade Barriers; A Cross-Country Investigation," IMF Working Papers 01/216, International Monetary Fund.
    12. Feenstra, Robert C. & Madani, Dorsati & Yang, Tzu-Han & Liang, Chi-Yuan, 1999. "Testing endogenous growth in South Korea and Taiwan," Journal of Development Economics, Elsevier, vol. 60(2), pages 317-341, December.
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    14. Drábek, Zdenek & Smith, Alasdair, 1995. "Trade Performance and Trade Policy in Central and Eastern Europe," CEPR Discussion Papers 1182, C.E.P.R. Discussion Papers.
    15. Feenstra, Robert C. & Yang, Tzu-Han & Hamilton, Gary G., 1999. "Business groups and product variety in trade: evidence from South Korea, Taiwan and Japan," Journal of International Economics, Elsevier, vol. 48(1), pages 71-100, June.
    16. Dani Rodrik, 1994. "Foreign Trade in Eastern Europe's Transition: Early Results," NBER Chapters,in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 319-356 National Bureau of Economic Research, Inc.
    17. Tito Boeri & Joaquim Oliveira Martins, 2002. "Varieties, Jobs and EU Enlargement," Rivista di Politica Economica, SIPI Spa, vol. 92(1), pages 139-178, January-F.
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    Cited by:

    1. Nirvikar Singh, 2008. "Transaction costs, information technology and development," Indian Growth and Development Review, Emerald Group Publishing, vol. 1(2), pages 212-236, September.
    2. Andreea Vass, 2005. "Romania and the trade and the development approaches to CEE convergence with the EU, under the competitive pressures of integration," IWE Working Papers 151, Institute for World Economics - Centre for Economic and Regional Studies- Hungarian Academy of Sciences.
    3. Marta Arespa, 2013. "The intensive and the extensive margins: not only an international issue," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 12(1), pages 1-34, April.
    4. Paul R. Bergin & Reuven Glick, 2005. "Tradability, productivity, and understanding international economic integration," Working Paper Series 2005-13, Federal Reserve Bank of San Francisco.
    5. Itai Agur, 2006. "Firm Heterogeneity and the Two Sources of Gains from Trade," Economics Working Papers ECO2006/38, European University Institute.
    6. Kang, Kichun, 2009. "The export price index with the effect of variety and an empirical analysis," Economic Modelling, Elsevier, vol. 26(2), pages 385-391, March.

    More about this item


    Trade Liberalization; Product Variety; Welfare; Transition Economies;

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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