Royale with Cheese: Globalization, Tourism, and the Variety of Goods

• Published date: 01 May 2014
• Author: Ronald B. Davies,Matthew T. Cole
• Date: 01 May 2014
• DOI: http://doi.org/10.1111/rode.12091

Royale with Cheese: Globalization, Tourism,

and the Variety of Goods

Matthew T. Cole and Ronald B. Davies*

Abstract

The key result of the so-called “New Trade Theory” is that countries gain from falling trade costs by an

increase in the number of varieties available to consumers. Though the number of varieties in a given

country rises, many models predict that global variety decreases as imported varieties drive out local vari-

eties. This is potentially worrisome when consumers care about non-exported foreign varieties as a result of

tourism (especially when foreign varieties are highly desired). Since lowering trade costs induces additional

firms to export and drives out some non-exported varieties, these modifications result in welfare losses not

accounted for in the existing literature. Nevertheless, improvements in non-tourism consumption outweigh

any such losses.

1. Introduction

Since Krugman (1979), the impact of globalization on the varieties available to con-

sumers has become a key feature in the debate over the merits of increased interna-

tional trade. Because falling trade barriers increase the set of varieties available

within a country, consumers benefit as the influx of imported varieties more than

compensates for domestic varieties that are driven from the market. Further, Melitz

(2003) and others show that when firms differ in productivities, there is a selection

effect wherein resources are reallocated to more productive firms as the less produc-

tive ones are driven from the market. Arkolakis et al. (2012) demonstrate that these

welfare gains hold in a variety of settings.1

Nevertheless, the existing literature assumes that consumers only care about the

varieties available within their country of residence despite the fact that they do

care about overseas varieties, most notably through tourism. For at least the

past 5 years, the world has spent on average US$1 trillion a year [or almost 2% of

world gross domestic product (GDP)] on tourism (World Tourism Organization,

2012). Thus, although not the dominant feature of economic activity, tourism is

nonnegligible and, just as variety matters for consumption at home, it matters for

consumption while overseas. In particular, tourists often prefer varieties available in

the overseas country relative to those available at home. For example, it is not

unusual for tourists to seek out “something local” when dining or purchasing

* Cole: Department of Economics, Florida International University, FL 33199, USA. Tel: +1-305-348-2318;

Fax: +1-348-1524; E-mail: matcole@fiu.edu. Davies: School of Economics, University College Dublin,

Dublin 4, Ireland. The authors thank participants at 2010 ETSG, 2011 IEA Meetings, Trinity College

Dublin, Paris School of Economics, University of Nottingham, Queen’s University Belfast, Université

Libre de Bruxelles, Fordham University, and University of Bayreuth. The authors acknowledge that this

paper is produced as part of the project “Globalization, Investment and Services Trade (GIST) Marie

Curie Initial Training Network (ITN)” funded by the European Commission under its Seventh Framework

Programme—Contract No. FP7-PEOPLE-ITN-2008-211429.

Review of Development Economics, 18(2), 386–400, 2014

DOI:10.1111/rode.12091

© 2014 John Wiley & Sons Ltd