Traditional Trade Theory

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New Trade theory New Economic Geography Market structure Perfect competition Monopolistic competition Monopolistic competition Plant level effects Generally constant returns to scale but with technological differences Natural resource endowments Factor endowments and intensities Generally increasing returns to scale Substitutability of differentiated goods Home market dominates Trade costs typically ignored IRS and pecuniary externalities (labour market, backward and forward linkages)

Technological externalities Positive trade costs Industrial concentration Location of industry determined by endowments Inter-industry specialisation according to comparative advantage and H-O theory Unique equilibria Location of industry determined exogenously Inter- and intra-industry specialisation Unique equilibria Location of industry determined endogenously through labour market, backward and forward linkages and migration Tendency to centripetal agglomeration Inter- and intra-industry specialisation

Multiple equilibria Trade Inter-industry Inter- and intra-industry Inter- and intra-industry Welfare effects of reducing trade barriers Net gain according to trade creation and trade diversion All countries gain Owners of scarce factors lose Net gains Large countries benefit more than small (i. e. bigger home market means more scale economies and/or more competition therefore better placed to take advantage from reduction in costs ) Owners of all factors possibly gain Net gains

Core/periphery can gain or lose at intermediate stages of integration according to ‘U’ curve (depending on initial size of markets, relative size of scale economies and trade/transport costs, and the size of any reduction in these and the extent of the migration response) Overview of the developments in the Spatial Trade models.


AJ Venables, Localization of industry and trade performance Oxford Review of Economic Policy, 12(3), 1996 pp 52-60 AJ Venables, The assessment: trade and location Oxford Review of Economic Policy, 14(2), 1998 pp. 1-6

K L M Midelfart Knarvik and H G Overmann: Delocation and European Integration, Economic Policy, 2002 M Amiti, New trade theories and industrial location in the EU: a survey of evidence Oxford Review of Economic Policy, 14(2), 1998, pp. 45-53 M Bri?? lhart, Trading places: Industrial specialisation in the EU, Journal of Common Market Studies, 36(1998) 319-346 M Bri?? lhart, Economic geography, industry location and trade: the evidence, The World Economy, 21(1998) 775-802 M Fujita, P Krugman, A J Venables, The Spatial Economy: Cities, Regions and International Trade (1999)

P R Krugman: Geography and trade, MIT press, Cambridge, Massachusetts (1991) P R Krugman and A J Venables, Integration, Specialization, and the Adjustment, European Economic Review, Vol. 40, 959-967 (1993) 1 The point was made by Krugman (1980), who modelled consumers in two countries as having different tastes, and showed that trade liberalization leads each country to specialize in and export those goods towards which domestic consumers are biased. Demand differences therefore lead to amplified differences in production, creating what has become known as the ‘home market’ effect.

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