CIAO DATE: 10/2014
April 2014
Norwegian Institute of International Affairs
The new trade theory, which emerged in the early 1980s, emphasised economies of scale and market failures as driving forces behind international trade. As opposed to the earlier theory, which mainly assumed perfect competition, the new trade theory provided a rationale for industrial policy. This article shows how industrial policy targeting specific firms or industries may be socially desirable within the new trade theory framework. Models from new economic geography and the more recent ‘new’ new trade theory with heterogeneous firms are also discussed. The main focus is put on models with pecuniary externalities.
Resource link: New trade theory: implications for industrial policy [PDF] - 1.2M