The Welfare Implications of Trading Blocs Among Countries with Different Endowments

Abstract

In this paper, we present a model where trade is motivated both by preference for variety and comparative advantages. We use this framework to analyze the welfare implications of trading blocs among countries with different endowments with and without transportation costs. In this framework, we address the following issues: a) the welfare implications of the consolidation of the world into a few trading blocs; b) the different incentives that rich and poor countries have in choosing their partners in trade arrangements; c) whether the welfare consequences of continental preferential trade arrangements depend on the relative endowments.