Bad Trade: The Loss of Variety
70 Pages Posted: 23 Mar 2020 Last revised: 3 Aug 2020
Date Written: January 31, 2020
We extend Krugman's (1979) model of trade to multiple sectors or industries and show that, sector-by-sector, a bit of trade is worse than no trade at all. The reason is that the gains from the initiation of trade are second-order, while the welfare loss from the associated drop in varieties is first-order. Variety shrinks in all sectors--not only in the newly tradable one. For asymmetric countries, we show that the low-cost country may be better off in autarky than under free and costless trade.
Keywords: New Trade Theory, Scale Gains, Love of Variety, Monopolistic Competition, Tariffs, Gains from Trade, Choke Prices
JEL Classification: F12, F13
Suggested Citation: Suggested Citation