Paul Krugman

Increasing returns, monopolistic competition, and international trade

Abstract This paper develops a simple, general equilibrium model of noncomparative advantage trade. Trade is driven by economies of scale, which are internal to firms. Because of the scale economies, markets are imperfectly competitive. Nonetheless, one can show that trade, and gains from trade, will occur, even between countries with identical tastes, technology, and factor endowments.

Globalization and the Inequality of Nations

A monopolistically competitive manufacturing sector produces goods used for final consumption and as intermediates. Intermediate usage creates cost and demand linkages between firms and a tendency for manufacturing agglomeration. How does globalization affect the location of manufacturing and gains from trade? At high transport costs all countries have some manufacturing, but when transport costs fall below a critical value, a core-periphery spontaneously forms, and nations that find themselves in the periphery suffer a decline in real income. At still lower transport costs there is convergence of real incomes, in which peripheral nations gain and core nations may lose.

The Myth of Asia's Miracle

O N C E U P O N a t i m e, W es t er n o p i n i o n l ea d er s f o u n d t h em s el v es b o t h i m p r es s ed a n d f r i g h t en ed b y t h e ex t r a o r d i n a r y g r o w t h r a t es a c h i ev ed b y a s et o f E a s t er n ec o n o m i es . A l t h o u g h t h o s e ec o n o m i es w er e s t i l l s u b s t a n t i a l l y p o o r er a n d s m a l l er t h a n t h o s e o f t h e W es t , t h e s p eed w i t h w h i c h t h ey h a d t r a n s f o r m ed t h em s el v es f r o m p ea s a n t s o c i et i es i n t o i n d u s t r i a l p o w er h o u s es , t h ei r c o n t i n u i n g a b i l i t y t o a c h i ev e g r o w t h r a t es s ev er a l t i m es h i g h er t h a n t h e a d v a n c ed n a t i o n s , a n d t h ei r i n c r ea s i n g a b i l i t y t o c h a l l en g e o r ev en s u r p a s s A m er i c a n a n d E u r o p ea n t ec h n o l o g y i n c er t a i n a r ea s s eem ed t o c a l l i n t o q u es t i o n t h e d o m i n a n c e n o t o n l y o f W es t er n p o w er b u t o f W es t er n i d eo l o g y . T h e l ea d er s o f t h o s e n a t i o n s d i d n o t s h a r e o u r f a i t h i n f r ee m a r k et s o r u n l i m i t ed c i v i l l i b er t i es . T h ey a s s er t ed w i t h i n c r ea s i n g s el f c o n f i d en c e t h a t t h ei r s y s t em w a s s u p er i o r : s o c i et i es t h a t a c c ep t ed s t r o n g , ev en a u t h o r i t a r i a n g o v er n m en t s a n d w er e w i l l i n g t o l i m i t i n d i v i d u a l l i b er t i es i n t h e i n t er es t o f t h e c o m m o n g o o d , t a k e c h a r g e o f t h ei r ec o n o m i c s , a n d s a c r i f i c e s h o r t -r u n c o n s u m er i n t er es t s f o r t h e s a k e o f l o n g -r u n g r o w t h w o u l d ev en t u a l l y o u t p er f o r m t h e i n c r ea s i n g l y c h a o t i c s o c i et i es o f t h e W es t . A n d a g r o w i n g m i n o r i t y o f W es t er n i n t el l ec t u a l s a g r eed .

Competitiveness: A Dangerous Obsession

IN J U N E 1993, Jacques Delors made a special presentation to the leaders of the nations of the European Community, meeting in Copenhagen, on the growing problem of European unemployment. Economists who study the European situation were curious to see what Delors, president of the EC Commission, would say. Most of them share more or less the same diagnosis of the European problem: the taxes and regulations imposed by Europes elaborate welfare states have made employers reluctant to create new jobs, while the relatively generous level of unemployment benefits has made workers unwilling to accept the kinds of low-wage jobs that help keep unemployment comparatively low in the United States. The monetary difficulties associated with preserving the European Monetary System in the face of the costs of German reunification have reinforced this structural problem. It is a persuasive diagnosis, but a politically explosive one, and everyone wanted to see how Delors would handle it. Would he dare tell European leaders that their efforts to pursue economic justice have produced unemployment as an unintended by-product? Would he admit that the EMS could be sustained only at the cost of a recession and face the implications of that admission for European monetary union?

A 'Reciprocal Dumping' Model of International Trade

This paper develops a model in which the rivalry of oligopolistic firms serves as an independent cause of international trade. The model shows how such rivalry naturally gives rise to ‘dumping’ of output in foreign markets, and shows that such dumping can be ‘reciprocal’ — that is, there may be two-way trade in the same product. Reciprocal dumping is shown to be possible for a fairly general specification of firm behaviour. The welfare effects of this seemingly pointless trade are ambiguous. On the one hand, resources are wasted in the cross-handling of goods: on the other hand, increased competition reduces monopoly distortions. Surprisingly, in the case of free entry and Cournot behaviour reciprocal dumping is unambiguously beneficial.

Growing World Trade: Causes and Consequences

WHAT ASPECT OF the American economy has changed most in the twenty-five years since Brookings Papers on Economic Activity first began appearing? If you took a poll of economic journalists, businessmen, or policy intellectuals other than professional economists, globalization-the growing integration of the United States with the world economy-would probably top the list. It is now conventional wisdom in many circles that the growth of world trade and investment has transformed the ground rules for economic policy. Admittedly, many international economists regard the popular conviction that unprecedented globalization has changed everything as considerably exaggerated; Americans are still so taken with the novelty of extensive international trade that they have yet to acquire a sense of perspective about its importance. Even today the shares of imports and exports in Americas GDP are only about half of what they were in the United Kingdom thirty years ago; the U.S. economy is not now, and may never be, as dependent on exports as Britain was during the reign of Queen Victoria. Nonetheless, international trade has certainly increased considerably since the 1960s. In 1960 the share of trade-measured as the average of imports and exports of goods and services-in Americas GDP was 4.7 percent; in 1994 it was 11.4 percent, an increase of more than 100 percent. While the growth of trade has not been quite as dramatic in other advanced countries, it has also been considerable: the average OECD country had a trade share of 12.5 percent in 1960, 18.6 percent in 1990. And a number of developing countries have seen

A Model of Innovation, Technology Transfer, and the World Distribution of Income

This paper develops a simple general-equilibrium model of product cycle trade. There are two countries, innovating North and noninnovating South. Innovation consists of the development of new products. These can be produced at first only in North, but eventually the technology of production becomes available to South. This technological lag gives rise to trade, with North exporting new products and importing old products. Higher Northern per capita income depends on the quasi rents from the Northern monopoly of new products, so that North must continually innovate not only to maintain its relative position but even to maintain its real income in absolute terms.

THE NARROW MOVING BAND, THE DUTCH DISEASE, AND THE COMPETITIVE CONSEQUENCES OF MRS. THATCHER Notes on Trade in the Presence of Dynamic Scale Economies

Abstract This paper presents a model of trade in which comparative advantage, instead of being determined by underlying attributes of countries, evolves over time through learning-by-doing. In this model, arbitrary patterns of specialization, once established, tend to become entrenched over time. The model sheds light on three widely held views that do not make sense in more conventional models. First is the view that temporary protection of selected sectors can permanently alter the pattern of comparative advantage in the protecting countrys favor. Second is the view that seemingly favorable developments, such as the discovery of exportable natural resources, may lead to a permanent loss of other sectors and reduce welfare in the long run. Third is the possibility that a temporary overvaluation of a currency due to tight money can lead to a permanent loss of competitiveness in some sectors.

What Happened to Asia

It seems safe to say that nobody anticipated anything like the current crisis in Asia. True, where some “Asia skeptics” - including myself - who regarded the claim of an Asian economic miracle as overstated, and argued that Asia was bound to run into diminishing returns eventually. And some people - again including myself- raised warning flags a year or two before the Thai crisis, noting that the current account deficits of Southeast Asian countries were as high as or higher than those of Latin America in 1994, and arguing that Asian economies had no special immunity to financial crises. But even pessimists expected something along the lines of a conventional currency crisis followed by at most a modest downturn, and we expected the longer-term slowdown in growth to emerge only gradually. What we have actually seen is something both more complex and more drastic: collapses in domestic asset markets, widespread bank failures, bankruptcies on the part of many firms, and what looks likely to be a much more severe real downturn than even the most negative-minded anticipated.

Trade policy and the Third World metropolis

Many of the worlds largest cities are now in developing countries. We develop a simple theoretical model, inspired by the case of Mexico, that explains the existence of such giant cities as a consequence of the strong forward and backward linkages that arise when manufacturing tries to serve a small domestic market. The model implies that these linkages are much weaker when the economy is open to international trade -- in other words, the giant Third World metropolis is an unintended by-product of import-substitution policies, and will tend to shrink as developing countries liberalize.