International Trade, Migration and Investment with Horizontal Product Differentiation and Free Entry and Exit of Firms

This paper builds a circular road model of the world with horizontal product differentiation and free entry and exit of firms, to show that freer international trade increases welfare - with ideal variety preferences - through the exploitation of economies of scale and better allocative efficiency, that all participating countries gain from trade, and that smaller countries have more to win from free trade than larger countries. Political resistance to trade liberalization, international migration and foreign direct investment are also analyzed with the model. Finally, the model provides a microfoundation for the use of demand curves with constant and negative slopes