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Title: New trade models, elusive welfare gains

Author(s): Kristian Behrens, Yoshitsugu Kanemoto and Yasusada Murata

Publication Date: November 2014

Keyword(s): cardinalization, new trade models, product diversity, subutility function and welfare gains from trade

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Behrens, K, Kanemoto, Y and Murata, Y. 2014. 'New trade models, elusive welfare gains'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10255