Do Three Trade Blocs Minimize World Welfare? |
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| Authors: | Volker Nitsch |
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| Affiliation: | Nitsch Bankgesellschaft Berlin, Volkswirtschaft, Hardenbergstrasse 32, 10623 Berlin, Germany and Free University of Berlin. Tel: +49 30 3109–4462, Fax: 3109-5031. I thank Detlef Lorenz for helpful discussions and Coretta Kittlauβfor excellent research assistance. Opinions expressed in this paper do not necessarily represent the views of the Bankgesellschaft Berlin |
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| Abstract: | Two interesting results have emerged from research on symmetric models that make the analysis of bilateralism tractable. Krugman reported that three trade blocs minimize world welfare. Frankel, Stein, and Wei argued that the formation of continental trading blocs can reduce welfare. This paper shows that these results are not robust. In particular, it is argued that the inclusion of more realistic assumptions into a symmetric model changes the picture considerably. Specifically, if one allows for transportation costs, conventional results are obtained. The phenomenon of three welfare-minimizing blocs and "super-natural" blocs disappears. |
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