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Royale with Cheese: The Effect of Globalization on the
Variety of Goods

Matthew T. Cole
University College Dublin

Ronald B. Davies
University College Dublin

IIIS Discussion Paper No. 329

Abstract

The key result of the so-called “New Trade Theory” is that countries gain from falling trade costs by an increase in the number of varieties available to consumers. Though the number of varieties in a given country rises, it is also true that global variety decreases from increased competition wherein imported varieties drive out some local varieties. This second result is a major issue for anti-trade activists who criticize the move towards free trade as promoting “homogenization” or “Americanization” of varieties across countries. We present a model of endogenous entry with heterogeneous firms which models this concern in two ways: a portion of a consumer’s income is spent overseas (i.e. tourism) and an existence value (a common tool in environmental economics where simply knowing that a species exists provides utility). Since lowering trade costs induces additional varieties to export and drives out some non-exported varieties, these modifications result in welfare losses not accounted for in the existing literature. Nevertheless, it is only through the existence value that welfare can fall as a result of declining trade barriers. Thus, for these criticisms of globalization to dominate, it must be that this loss in the existence value outweighs the direct benefits
from consumption.

Keywords

Keywords: Trade Theory; Globalization; Variety; Tourism
JEL: F10; F12; F13

 


Last updated 28 August 2014 by IIIS (Email).