Paul Krugman
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Really, I don’t want to talk about me when the world is melting down, but I have had a number of requests for an informal explanation of what I got you-know-what for. So here’s an attempt.
It’s really about two related things: the “new trade theory” and the “new economic geography.”
OK, so what was the “old” trade theory? It’s what you probably learned if you took intro economics. Countries are different – they have different levels of productivity in particular industries, they have different resources, and those differences drive trade. Tropical countries grow and export bananas, temperate countries grow and export wheat. Countries with highly educated workers export high-tech goods, countries with less educated workers export shirts and pajamas.
The new trade theory starts with the observation that while this explains a lot of world trade, it also misses a lot. France and Germany sell lots of stuff to each other, even though they have similar climates and resources; so do the United States and Canada. What’s that about?
It’s really about two related things: the “new trade theory” and the “new economic geography.”
OK, so what was the “old” trade theory? It’s what you probably learned if you took intro economics. Countries are different – they have different levels of productivity in particular industries, they have different resources, and those differences drive trade. Tropical countries grow and export bananas, temperate countries grow and export wheat. Countries with highly educated workers export high-tech goods, countries with less educated workers export shirts and pajamas.
The new trade theory starts with the observation that while this explains a lot of world trade, it also misses a lot. France and Germany sell lots of stuff to each other, even though they have similar climates and resources; so do the United States and Canada. What’s that about?
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