Working Paper: NBER ID: w15593
Authors: Robert C. Feenstra
Abstract: Three sources of gains from trade under monopolistic competition are: (i) new import varieties available to consumers; (ii) enhanced efficiency as more productive firms begin exporting and less productive firms exit; (iii) reduced markups charged by firms due to import competition. The first source of gains can be measured as new goods in a CES utility function for consumers. We argue that the second source is formally analogous to the producer gain from new goods, with a constant-elasticity transformation curve for the economy. We suggest that the third source of gain can be measured using a translog expenditure function for consumers, which in contrast to the CES case, allows for finite reservation prices for new goods and endogenous markups.
Keywords: Gains from Trade; Monopolistic Competition; Consumer Welfare; Efficiency Gains; Import Competition
JEL Codes: F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| new import varieties (F14) | consumer welfare (D69) |
| self-selection of more efficient firms into export markets (F12) | overall productivity (O49) |
| import competition (L13) | reduced markups (D40) |