CID Working Paper No. 14

Pattern of Trade and Economic Development in the Model of Monopolistic Competition

Jeffrey D. Sachs, Xiaokai Yang, and Dingsheng Zhang

April 1999

Abstract

The paper introduces differences in production and transaction conditions between countries into the model of monopolistic competition to investigate the interplay between trade policies and development strategies. It applies inframarginal analysis, which is total benefit analysis between corner solutions in addition to marginal analysis of each corner solution, to show that as transaction conditions are improved, the general equilibrium may discontinuously jump across different patterns of trade and economic development. It compares the marginal and inframarginal comparative statics of equilibrium in the model of monopolistic competition with the core theorems in the neoclassical trade models and with conventional wisdom in development economics. It shows that as analytical framework is altered, the meanings of concepts and related empirical observations will be changed too.

Keywords: trade pattern, development strategy, income distribution, terms of trade

JEL codes: F12, F13, O10

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