Working Paper: NBER ID: w5697
Authors: Kiminori Matsuyama
Abstract: To explain cross-country differences in economic performance, the economics of coordination failures typically portrays each country in a closed economy model with multiple equilibria and then argues that the poor countries are in an equilibrium inferior to those achieved by the rich. This approach cannot tell us anything about the degree of inequality in the world economy. A more satisfactory approach would be to build a world economy model and show why it has to be separated into the rich and the poor regions, i.e., to demonstrate the co-existence of the rich and poor as an inevitable aspect of the world trading system. In the present model, the symmetry-breaking of the world economy into the rich and the poor occurs because international trade causes agglomeration of different economic activities in different regions of the world. International trade thus creates a kind of pecking order among nations, and as in a game of musical chairs, some countries must be excluded from being rich.
Keywords: international trade; economic performance; agglomeration economies; coordination failures
JEL Codes: F1; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| International trade (F19) | Agglomeration of economic activities (R11) |
| Agglomeration of economic activities (R11) | Pecking order among nations (F52) |
| Comparative advantages in goods with large agglomeration economies (F12) | Countries become rich (O57) |
| Comparative advantages in goods with smaller agglomeration economies (F12) | Countries become poor (F63) |
| Initial conditions and nature of goods produced (P42) | Economic outcomes for countries (O57) |
| Coordination failures (P11) | Exclusion from prosperity (F69) |