Globalization and Individual Gains from Trade (revised version)

Kristian Behrens () and Yasusada Murata

Cahiers de recherche from CIRPEE

Abstract: We analyze the impact of globalization on individual gains from trade in a general equilibrium model of monopolistic competition featuring product diversity, pro-competitive effects and income heterogeneity between and within countries. We show that, although trade reduces markups in both countries, its impact on variety depends on their relative position in the world income distribution: product diversity in the lower income country always expands, while that in the higher income country may shrink. When the latter occurs, the richer consumers in the higher income country may lose from trade because the relative importance of variety versus quantity increases with income. Using data on GDP per capita and population, as well as on the U.S. income distribution, we illustrate our theoretical results in two different contexts: the hypothetical bilateral trade liberalization between the U.S. and 188 countries; and the historical sequence of U.S. free trade agreements since 1985.

Keywords: Income heterogeneity; product diversity; pro-competitive effects; general equilibrium; monopolistic competition (search for similar items in EconPapers)
JEL-codes: D43 F12 F15 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1218

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