Bulletin n. 2-3/2012 | ||
October 2012-February 2013 | ||
Behrens Kristian, Murata Yasusada |
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Globalization and individual gains from trade | ||
in Journal of Monetary Economics , Volume 59, Issue 8, December 2012 , 2012 , Pages 703-720 | ||
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. Although trade reduces markups in both countries in our framework, 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, our theoretical results are illustrated 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. | ||