Variety, globalization, and social efficiency

W. Michael Cox and Roy J. Ruffin

No 806, Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper puts recent work on the benefits of variety into the context of an exact quantitative analysis of the Dixit-Stiglitz-Krugman model of monopolistic competition. We show that the gains from international trade are almost completely determined by the increase in variety and not economies of scale, and that the social efficiency question is quantitatively insignificant. These results follow from allowing the number of varieties to affect the elasticity of demand facing each firm. Most applications of the DSK model abstract from variety?s effect by assuming that the elasticity of demand facing each firm equals the elasticity of substitution in a CES utility function, thus fixing the output of each firm by the resulting markup over marginal costs. Finally, we develop a precise expression for real per capita income with any number of sectors. ; Also issued as Globalization and Monetary Policy Institute Working Paper No. 15

Pages: 25 pages
Date: 2008
Note: Published as: Cox, W. Michael and Roy J. Ruffin (2010), "Variety, Globalization, and Social Efficiency," Southern Economic Journal 76 (4): 1064-1075.
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