New Trade Models, Elusive Welfare Gains

16 Pages Posted: 17 Nov 2014

See all articles by Kristian Behrens

Kristian Behrens

University of Quebec at Montreal (UQAM) - Department of Economics

Yoshitsugu Kanemoto

University of Tokyo - Faculty of Economics

Yasusada Murata

Nihon University

Date Written: November 2014

Abstract

We generalize the formulae for welfare changes by Arkolakis, Costinot, and Rodríguez-Clare (2012) and Melitz and Redding (2014a) to allow for various cardinalizations of the subutility functions for varieties. Despite the same macro restrictions and the same equilibrium allocations, our new formula coincides with the original ones if and only if the number of varieties is invariant to foreign shocks. When product diversity responds to foreign shocks, different cardinalizations generate different welfare changes, thus revealing a fundamental difficulty in quantifying welfare gains implied by new trade models.

Keywords: cardinalization, new trade models, product diversity, subutility function, welfare gains from trade

JEL Classification: F11, F12

Suggested Citation

Behrens, Kristian and Kanemoto, Yoshitsugu and Murata, Yasusada, New Trade Models, Elusive Welfare Gains (November 2014). CEPR Discussion Paper No. DP10255, Available at SSRN: https://ssrn.com/abstract=2526368

Kristian Behrens (Contact Author)

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

Yoshitsugu Kanemoto

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan
81-3-038-1221-11 (Phone)

Yasusada Murata

Nihon University ( email )

Tokyo
Japan

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