Integration and welfare in a NEG model with Multinational Firms
We construct a two-country international trade model with national and multinational (multiplant) firms and we investigate the effect of economic integration on welfare both at the country and at the world level. Results crucially depend on the share of industrial profits owned by a country. More precisely, if the share of profits owned by a country is too small, then the overall impact of integration on welfare is negative and positive otherwise. The intution lies on the two competing and opposite effects that integration have on profits and on the perfect price index. On the one hand, trade integration always increases profits due to a positive effect on foreign sales which is always good for industrial firm enjoying increasing returns. This positive effect on profits translates into a positive effect on real income and then on consumer welfare. On the other hand, trade integration always increase the perfect price index because it reduces the profitability and the number of multinational firms and then reduces the range of differentiated goods available to the local variety-lover consumer. This positive effect on the price index translates into a negative effect on real income and then on consumer welfare. The first (positive) effect dominates the second (negative), and then integration is good for welfare, when a country owns a sufficiently large share of profits i.e. when is 'rich' while the opposite happens otherwise. Finally, our model also provides some interesting results on the relation between trade integration and welfare at the aggregate (world) level. It is shown that the latter relation is U-shaped: integration is bad for aggregate welfare when the degree of integration itself is relatively low, while it is good for aggregate welfare when countries are sufficiently well integrated. Hence our model predicts that there exists a degree of integration which minimizes welfare. In relation to this, we think our model provide interesting policy implications as it suggests that when countries are not-well integrated then a marginal increase in the degree of liberatisation may be harmful at the world level while a strong improvement of economic integration is always good for aggregate welfare.