Do Three Trade Blocs Minimize World Welfare?

Volker Nitsch

Review of International Economics, 1996, vol. 4, issue 3, 355-63

Abstract: Two interesting results have emerged from research on symmetric models that make the analysis of bilateralism tractable. Krugman reported that three trade blocs minimize world welfare. Frankel, Stein, and Wei argued that the formation of continental trading blocs can reduce welfare. This paper shows that these results are not robust. In particular, it is argued that the inclusion of more realistic assumptions into a symmetric model changes the picture considerably. Specifically, if one allows for transportation costs, conventional results are obtained. The phenomenon of three welfare-minimizing blocs and "super-natural" blocs disappears. Copyright 1996 by Blackwell Publishing Ltd.

Date: 1996
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