The Importance of Being Small. Or When Countries are Areas and Not Points

34 Pages Posted: 6 Sep 2001

See all articles by Joe Tharakan

Joe Tharakan

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Jacques-François Thisse

Catholic University of Louvain (UCL); Centre for Economic Policy Research (CEPR)

Date Written: September 2001

Abstract

Market size and transport costs are important ingredients of international trade. We propose to look at these issues from a different perspective. Using a Hotelling duopoly model with quadratic transport costs, we analyse the welfare effects of international trade between two countries that differ only in size. Our results indicate that in most cases free trade will lead to a decrease in prices. Furthermore, the firm of the small country will benefit from market expansion. Finally, the model predicts that the small country benefits from a move towards free trade whereas the opening to trade may hurt the large country.

Keywords: International trade, geographical nation size, mill pricing, spatial competition

JEL Classification: F12, L13

Suggested Citation

Tharakan, Joe and Thisse, Jacques-François, The Importance of Being Small. Or When Countries are Areas and Not Points (September 2001). CEPR Discussion Paper No. 2938. Available at SSRN: https://ssrn.com/abstract=282580

Joe Tharakan (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium
+32 10 47 43 57 (Phone)
+32 10 47 43 01 (Fax)

Jacques-François Thisse

Catholic University of Louvain (UCL) ( email )

Place des Doyens 1
Louvain-la-Neuve, 1348
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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