New Evidence on the Gains from Trade

We summarize the evidence on the gains from trade in monopolistic competition models, arising from three sources: (i) price reductions due to increasing returns to scale; (ii) increased product variety available to consumers; (iii) self-selection of firms with only the most efficient firms surviving after trade liberalization. There is little direct evidence to support the first source of gains from trade, though some indirect evidence from the European Union. The second and third sources of gains from trade find strong empirical support from studies from various countries, relying on new models and new empirical methods. JEL no. F10, F12, F15