Krugman Trade Theory and Developing Economies

Abstract

This paper examines the founding of a new trade theory which has won Nobel Prize for Paul Krugman. The theory is an explanation of the actual pattern of trade between similarly endowed countries in respect of factor endowments, tastes, technology, etc., as against the classical theory of trade between differently endowed countries. It takes the aspects of monopolistic competition of product differentiation or distinction, large scale production, decreasing costs or increasing returns. The theory has many lessons for the developing economies like India, for which strategic trade policy is a good policy option, for bringing out the variety of trade potentials of the country.