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Endogenous trading bloc formation in a North-South global economy

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The majority of the trading blocs to date are between similar countries, rather than between developed and developing countries. This paper provides a rationale for why trading blocs among similar countries may arise as an equilibrium phenomenon. It develops a model of an asymmetric world economy in which there are at least four countries. The countries are differentiated with respect to their market size and they choose their trading partners. In the coalition-proof Nash equilibrium, either there is global free trade or free trade areas are formed among similar countries.
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Keywords: F02; F13; F15

Document Type: Research Article

Affiliations: 1: Planning Unit, Indian Statistical Institute 2: Department of Economics, Burdwan University

Publication date: 2006-08-01

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