Bad Trade: The Loss of Variety

70 Pages Posted: 23 Mar 2020 Last revised: 3 Aug 2020

See all articles by John Morgan

John Morgan

University of California, Berkeley

Justin Tumlinson

Loughborough University; Ludwig Maximilian University of Munich (LMU)

Felix Várdy

CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 31, 2020

Abstract

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

Morgan, John and Tumlinson, Justin and Várdy, Felix, Bad Trade: The Loss of Variety (January 31, 2020). Available at SSRN: https://ssrn.com/abstract=3529246 or http://dx.doi.org/10.2139/ssrn.3529246

John Morgan

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Justin Tumlinson (Contact Author)

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain
+44 (0) 2038051339 (Phone)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Felix Várdy

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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