Abstract
In this chapter we examine the main models of the new theories of international trade, as classified in Table 7.1.
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Notes
- 1.
In this model it is immaterial whether the producer maximizes profit by setting the price or the quantity.
- 2.
Here we have taken an innocuous shortcut. Wage equalization results from the equilibrium condition for the trade balance. But this would take us into some unnecessary technicalities. To simplify the exposition, we have “guessed” that wages equalize and have verified that the trade balance equilibrium condition is satisfied under wage equalization.
- 3.
The terminology “home market effect” appears for the first time in Helpman and Krugman (1985, chap. 10), where it refers to the second phenomenon mentioned in the text. Later it became clear that the two phenomena are just two different manifestations of the same economic mechanism. See Head and Mayer (2004) for a critical and comprehensive appraisal on the literature referring to either of these two phenomena.
- 4.
As an example, assume that \(L_{1} = L_{2} = 10\) and that the other model parameters are such that in the initial equilibrium \(w_{1} = w_{2} = 1\) and that the expenditure on any domestic variety emanating from country 1’s residents is 10 % of income while the expenditure on any domestic variety emanating from country 2’s residents is 8 % of income. Initial national income is 10 in both countries. Now consider a shock \(\Delta L_{1} = -\Delta L_{2} > 1\). The excess demand for any country 1’s variety is \(0.1 - 0.08 = 0.02 > 0\).
- 5.
Firms are identical, so the model does not indicate which firms will succumb. This is an issue that we shall discuss in Sect. 9.2.7 below.
- 6.
The draw is not free. Firms have to pay a fixed cost equal to F e units of labour in order to draw the marginal productivity. This stylized mechanism may reflect, for instance, the cost incurred in acquiring the relevant information about the expected costs and benefits of operating a business.
- 7.
Unlike the model studied in Sect. 9.2.1, the free entry condition and the zero profit condition are disjoint. The free entry condition requires that the expected profit from running a business should equal the entry cost w F e . The expected profit from running the business depends on the expected value of ϕ, which in turn depends on the probability distribution of ϕ.
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Gandolfo, G. (2014). The Models. In: International Trade Theory and Policy. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-37314-5_9
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