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Trade as an Engine of Political Change. A Parable

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  • Casella, Alessandra
Abstract
If efficient economic activity requires appropriate public goods, then changes in the volume and flow of trade will induce changes in the demand for these public goods. In general, if people disagree over their preferred levels of public goods, the expansion of trade may affect the structure of jurisdictions responsible for their provision. This paper presents a simple example, a parable, designed to illustrate the general principle. It studies a general equilibrium model where the size of the market is easily parametrized and welfare depends on private exchange and two public goods. Preferences over the second of these public goods are heterogeneous, but administrative costs initially make the formation of two separate jurisdictions too expensive. As the market expands, however, reliance on the public goods increases and with it the importance of having access to the correct public good. A federal system becomes optimal when the market is sufficiently large.

Suggested Citation

  • Casella, Alessandra, 1993. "Trade as an Engine of Political Change. A Parable," CEPR Discussion Papers 779, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:779
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    References listed on IDEAS

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    1. Bayoumi, Tamim & Eichengreen, Barry, 1994. "Macroeconomic Adjustment under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis," Economic Journal, Royal Economic Society, vol. 104(425), pages 813-827, July.
    2. Alessandra Casella, 1992. "Arbitration in International Trade," NBER Working Papers 4136, National Bureau of Economic Research, Inc.
    3. Frankel, Jeffrey, 1993. "Three Comments on Exchange Rate Stabilization and European Monetary Union," Center for International and Development Economics Research (CIDER) Working Papers 233192, University of California-Berkeley, Department of Economics.
    4. Barry Eichengreen, 1992. "Is Europe an Optimum Currency Area?," Palgrave Macmillan Books, in: Silvio Borner & Herbert Grubel (ed.), The European Community after 1992, chapter 8, pages 138-161, Palgrave Macmillan.
    5. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    6. Barry Eichengreen, 1992. "The origins and nature of the Great Slump revisited," Economic History Review, Economic History Society, vol. 45(2), pages 213-239, May.
    7. Alessandra Casella & Jonathan S. Feinstein, 1990. "Public Goods in Trade: On the Formation of Markets and Political Jurisdictions," NBER Working Papers 3554, National Bureau of Economic Research, Inc.
    8. Eichengreen, Barry, 1993. "A Marshall Plan for the East: Options for 1993," Center for International and Development Economics Research (CIDER) Working Papers 233185, University of California-Berkeley, Department of Economics.
    9. Maurice Obstfeld., 1993. "Model Trending Real Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers C93-011, University of California at Berkeley.
    10. Barry Eichengreen., 1992. "The Political Economy of Fiscal Policy After EMU," Center for International and Development Economics Research (CIDER) Working Papers C92-004, University of California at Berkeley.
    11. Jeff Frankel, Steve Phillips, and Menzie Chinn., 1992. "Financial and Currency Integration in the European Monetary System: The Statistical Record," Center for International and Development Economics Research (CIDER) Working Papers C92-005, University of California at Berkeley.
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    Cited by:

    1. Barry Eichengreen., 1993. "The Crisis in the EMS and the Transition to EMU: An Interim Assessment," Center for International and Development Economics Research (CIDER) Working Papers C93-022, University of California at Berkeley.
    2. Eichengreen, Barry, 1993. "Thinking about Migration: Notes on European Migration Pressures at the Dawn of the Next Millennium," Center for International and Development Economics Research (CIDER) Working Papers 233200, University of California-Berkeley, Department of Economics.
    3. Barry Eichengreen., 1993. "Prerequisites for International Monetary Stability," Center for International and Development Economics Research (CIDER) Working Papers C93-018, University of California at Berkeley.
    4. Frankel, Jeffrey A. & Funke, Norbert, 1994. "A Two-Country Analysis of International Targeting of Nominal GNP," Center for International and Development Economics Research (CIDER) Working Papers 233377, University of California-Berkeley, Department of Economics.

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    More about this item

    Keywords

    Economic Integration; Federalism; Jurisdictions;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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