Royale with Cheese: The Effect of Globalization on the Variety of Goods

Matthew Cole and Ronald Davies

The Institute for International Integration Studies Discussion Paper Series from IIIS

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.

Keywords: firm heterogeneity; tourism (search for similar items in EconPapers)
JEL-codes: F12 F14 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2010-07
New Economics Papers: this item is included in nep-int and nep-tur
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Citations: View citations in EconPapers (2)

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Working Paper: Royale with cheese: the effect of globalization on the variety of goods (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:iis:dispap:iiisdp329

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