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

J. Peter Neary and Mrázová, Monika
Authors registered in the RePEc Author Service: Monika Mrazova ()

No 9839, CEPR Discussion Papers from Centre for Economic Policy Research

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 very differently, the latter typically implying a form of reciprocal dumping. Globalization and lower trade costs have very different effects: the former reduces spending on all existing varieties, the latter switches spending from home to imported varieties; in the plausible case where demands are less convex than CES, globalization raises firm output whereas lower trade costs reduce it. Finally, calibrating gains from trade is harder. Many more parameters need to be calibrated than in the CES case, while import demand elasticities are likely to overestimate the true elasticities, and so underestimate the gains from trade.

Keywords: Super- and subconvexity of demand; Additively separable preferences; Ces preferences; Iceberg trade costs; Quantifying gains from trade; Super- and subconcavity of utility (search for similar items in EconPapers)
JEL-codes: F12 F15 F17 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Journal Article: Together at Last: Trade Costs, Demand Structure, and Welfare (2014)
Working Paper: Together at Last: Trade Costs, Demand Structure, and Welfare (2014)
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