TRADE AND WAGES, Reconsidered by Paul KRUGMAN

Prior to Krugman's work, trade theory emphasized trade based on the comparative advantage of countries with very different characteristics, such as a poor country exporting agricultural goods to a rich country in exchange for industrial products. However, in the 20th century, an ever larger share of trade occurred between countries with very similar characteristics, which is difficult to explain by comparative advantage. Each country may specialize in producing a few brands of any given type of product, instead of specializing in different types of products.
Krugman's model also involved introducing transportation costs, a key feature in producing the "home market effect" which would later become key for Krugman's work on the new economic geography. The home market effect "states that, ceteris paribus, the country with the larger demand for a good will, at equilibrium, produce a more than proportionate share of that good and be a net exporter of it." Many models of international trade now follow Krugman's lead, incorporating economies of scale in production and a preference for diversity in consumption. This way of modeling trade has come to be called New Trade Theory.
This paper helps us to understand that trade has only modest effects on inequality rests on relatively old data and that there has been a dramatic increase in manufactured imports from developing countries since the early 1990s. Due to this increase there is an inequality in the United States and other advanced countries. This analysis shows us also the changing nature of world trade but also how it has outpaced our ability to engage in secure quantitative analysis.In his conclusion Paul Krugman end the analysis with a question which is ‘How can we quantify the actual effect of rising trade on wages?’

Paul Krugman had concluded by the past that trade with poor countries played only a small role in America's rising wage inequality, explaining