| 'Natural' Trading Blocs: A Closer Look* |
Volker Nitsch |
| Bankgesellschaft Berlin, and, Humboldt University of Berlin |
| Copyright ©1997 Journal of Economic Integration |
| ABSTRACT |
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It is occasionally argued that the formation of trading blocs between geographically proximate countries should be encouraged because positive welfare effects are more likely to outweigh negative welfare effects. This paper presents a simple differentiated products model that allows to test whether the formation of a 'natural' trading bloc, first, is indeed increasing world welfare and, second, is welfare-superior to the formation of an 'unnatural' trading bloc. Simulations show that, while the removal of trade barriers always improves world welfare , 'unnatural' bloc formation may, under some conditions, be welfare-superior to the formation of trading blocs along 'natural' lines. The concept of 'natural' trading blocs is therefore a misguided prescription. (JEL Classification: F15) |
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