Working Paper: CEPR ID: DP7448
Authors: Kristian Behrens; Yasusada Murata
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. We illustrate this effect using data on GDP per capita and population for 186 countries, as well as parameter estimates for domestic income distributions. Our results suggest that U.S. trade with countries of similar GDP per capita makes all agents in both countries better off, whereas trade with countries having lower GDP per capita may adversely affect up to 11% of the U.S. population.
Keywords: general equilibrium; income heterogeneity; monopolistic competition; procompetitive effects; product diversity
JEL Codes: D43; F12; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade (F19) | markups (D43) |
| markups (D43) | consumer prices (P22) |
| trade (F19) | product diversity (L15) |
| product diversity (L15) | consumer welfare (lower-income countries) (F61) |
| trade (F19) | product diversity (higher-income countries) (F61) |
| product diversity (higher-income countries) (F61) | consumer welfare (higher-income countries) (F61) |
| trade with lower GDP per capita countries (F19) | adverse impact on US population (I14) |
| US intra-industry trade with countries of similar GDP per capita (F14) | benefits all consumers (D18) |