Review for Dec 6 class 經濟四 B07303059 呂姵茵

Krugman(1979) market structure is monopolistic competition, firms produce

differentiated products and charge monopoly prices, but they earn zero profit
because of free entry. The model states increasing returns to scale and assume same
technologies across countries, and has labor as its only factor. The equilibrium is
denoted by the intersection of two graphs: ZZ(zero profit) p/w=β+fe/Ic and PP(profit
max) p/w=ε(c)/( ε(c)-1)* β. The per-output labor requirement is Iω/yω=fe/yω+β,
which means that per-unit cost is decreasing in the amount of total output.
Therefore average cost is decreasing and has increasing returns to scale. Under IRS
assumption, fe>0 in the ZZ curve. If fe is close to zero, pω/w=β, it wouldn’t change
even if I changes, and there will be no gains from trade. Therefore IRS assumption is
important for the model.
Krugman(1980) assumes that v(cω) = cωθ, which violates Krugman(1979)’s
assumption that ε′ω(cω)<0. The model can explain the two sources of gains
from trade: real wage and variety. The wage ratio between countries can be found by
trade balance. w/ w ∗=I(w/ w ∗t)^( θ/θ-1)+I∗/I∗(w∗/wt)^( θ/θ-1)+I . It also
studies Home market effect, countries will tend to export goods for which they have
larger domestic demand. It suggests that if home and foreign have different tastes,
each will specialize in the industry for which it has larger home market, and each will
be a net exporter of the industry it specializes in.
Under free trade, world equilibrium occurs when import demand equals export
supply, i.e. world supply equals world demand. Specific tariff is fixed price charged
for each goods imported, ad valorem tariff is fraction of the value of imported goods.
Under both types of tariff , consumer surplus decreases, producer surplus increases
and government revenue increases. Changes in welfare is unknown but often falls for
small economies. Under export subsidy, consumer and producer surplus both
increases, government revenue decreases because of subsidy cost, and total welfare
decreases. Under import quota, consumer surplus falls and producer surplus
increases. There is no change in government revenue because all the rents go to
license holders. The change in welfare is unknown but often decreases for small
economies. Under VER( voluntary export restraint), consumer surplus decreases and
producer surplus increases. There is no change in government revenue since all rents
go to foreigners. The total welfare decreases.