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The Regionalization of the World Economy$
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Jeffrey A. Frankel

Print publication date: 1997

Print ISBN-13: 9780226259956

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226260228.001.0001

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The Welfare Implications of Trading Blocs among Countries with Different Endowments

The Welfare Implications of Trading Blocs among Countries with Different Endowments

(p.121) 5 The Welfare Implications of Trading Blocs among Countries with Different Endowments
The Regionalization of the World Economy

Antonio Spilimbergo

Emesto Stein

University of Chicago Press

Over the last decade, a large number of bilateral trading arrangements have been created, strengthened, or proposed in nearly every region of the world. Empirical evidence on bilateral trade flows shows that this phenomenon has been accompanied by increased trade regionalization, at least in some regions. Therefore, the study of the economic welfare implications of trading blocs has become very relevant. This chapter examines the likely welfare effects of trade regionalization by using a two-factor model where trade is explained both by product differentiation and comparative advantage. It looks at the case of preferential trade agreements as well as that of free trade areas, the effects of transport costs, and the effects of different countries having different levels of tariffs. After setting up the model for the closed economy, the chapter allows for trade and then considers the welfare implications of different types of trade arrangements.

Keywords:   economic welfare, trading blocs, trade regionalization, comparative advantage, product differentiation, free trade areas, preferential trade agreements, tariffs, closed economy, transport costs

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