page_title: Paul Krugman
section_title: New trade theory
hierarchical_section_title: Paul Krugman / Academic career / New trade theory
caption_attribution_description: Русский: График иллюстрирует модель центра и окраины Пола Кругмана. По горизонтальной оси отложены расходы на торговлю между двумя регионами. По вертикальной оси отложены доли выбранного региона в промышленном производстве. Непрерывной линией на графике обозначено устойчивое равновесие, а пунктирной&#160;— неустойчивое. К&#160;— критическая точка (точка бифуркации). Українська: Графік ілюструє модель центру й периферії Пола Круґмана. По горизонтальній осі відкладені витрати на торгівлю між двома регіонами. По вертикальній осі відкладені частки обраного регіону в промисловому виробництві. Неперервною лінією на графіку позначена стійка рівновага, а пунктирною&#160;— нестійка. К&#160;— критична точка (точка біфуркації). English: The figure illustrates Krugman’s ‘core-periphery’ model. The horizontal axis represents costs of trade between the two regions. The vertical axis represents the share of either region in manufacturing. Solid lines on the graph denote stable equilibria. Dashed lines denotes unstable equilibria. K is a critical (bifurcation) point.
context_page_description: Paul Robin Krugman is an American economist who is the Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for The New York Times. In 2008, Krugman was awarded the Nobel Memorial Prize in Economic Sciences for his contributions to New Trade Theory and New Economic Geography. The Prize Committee cited Krugman's work explaining the patterns of international trade and the geographic distribution of economic activity, by examining the effects of economies of scale and of consumer preferences for diverse goods and services.
  Krugman was previously a professor of economics at MIT, and later at Princeton University. He retired from Princeton in June 2015, and holds the title of professor emeritus there. He also holds the title of Centennial Professor at the London School of Economics. Krugman was President of the Eastern Economic Association in 2010, and is among the most influential economists in the world. He is known in academia for his work on international economics, economic geography, liquidity traps, and currency crises.
context_section_description: Prior to Krugman's work, trade theory (see David Ricardo and Heckscher–Ohlin model) emphasized trade based on the comparative advantage of countries with very different characteristics, such as a country with a high agricultural productivity trading agricultural products for industrial products from a country with a high industrial productivity. However, in the 20th century, an ever-larger share of trade occurred between countries with similar characteristics, which is difficult to explain by comparative advantage. Krugman's explanation of trade between similar countries was proposed in a 1979 paper in the Journal of International Economics, and involves two key assumptions: that consumers prefer a diverse choice of brands, and that production favors economies of scale. Consumers' preference for diversity explains the survival of different versions of cars like Volvo and BMW. However, because of economies of scale, it is not profitable to spread the production of Volvos all over the world; instead, it is concentrated in a few factories and therefore in a few countries (or maybe just one). This logic explains how each country may specialize in producing a few brands of any given type of product, instead of specializing in different types of products.
  Krugman modeled a 'preference for diversity' by assuming a CES utility function like that in a 1977 paper by Avinash Dixit and Joseph Stiglitz. Many models of international trade now follow Krugman's lead, incorporating economies of scale in production and a preference for diversity in consumption. This way of modeling trade has come to be called New Trade Theory.
  Krugman's theory also took into account transportation costs, a key feature in producing the "home market effect", which would later feature in his work on the new economic geography. The home market effect "states that, ceteris paribus, the country with the larger demand for a good shall, at equilibrium, produce a more than proportionate share of that good and be a net exporter of it." The home market effect was an unexpected result, and Krugman initially questioned it, but ultimately concluded that the mathematics of the model were correct.
  When there are economies of scale in production, it is possible that countries may become 'locked into' disadvantageous patterns of trade. Krugman points out that although globalization has been positive on a whole, since the 1980s the process known as hyper-globalization has at least played a part in rising inequality. Nonetheless, trade remains beneficial in general, even between similar countries, because it permits firms to save on costs by producing at a larger, more efficient scale, and because it increases the range of brands available and sharpens the competition between firms. Krugman has usually been supportive of free trade and globalization. He has also been critical of industrial policy, which New Trade Theory suggests might offer nations rent-seeking advantages if "strategic industries" can be identified, saying it's not clear that such identification can be done accurately enough to matter.
caption: Graph illustrating Krugman's 'core-periphery' model. The horizontal axis represents costs of trade, while the vertical axis represents the share of either region in manufacturing. Solid lines denote stable equilibria, dashed lines denote unstable equilibria.
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