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Painful Birth of Trade Under Classical Monopolistic Competition

Igor Bykadorov (), Andrea Ellero (), Stefania Funari (), Sergey Kokovin and Pavel Molchanov ()
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Pavel Molchanov: National Research University Higher School of Economics

HSE Working papers from National Research University Higher School of Economics

Abstract: In the standard Krugman (1979) non-CES trade model, several asymmetric countries typically lose from increasing trade costs. However, all countries transiently benefit from such increase at the moment of closing trade, under almost-prohibitive trade costs (i.e., near autarky, which is possible only under non-CES preferences). In other words, during trade liberalization the first step from autarky to trade is necessarily harmful. Our explanation rests on market distortion and business destruction effects.

Keywords: Trade gains; monopolistic competition; variable elasticity of substitution; free trade; autarky. (search for similar items in EconPapers)
JEL-codes: D43 F12 L13 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016
New Economics Papers: this item is included in nep-int
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Published in WP BRP Series: Economics / EC, April 2016, pages 1-35

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