While researching for my current diploma thesis on “new new” trade theory I realized that fully understanding (or rather: knowing by heart) the Dixit/Stiglitz (1977) model is a necessary precondition to be able to read most of the relevant papers. Unfortunately, the original Dixit/Stiglitz is not written for undergraduate students (intermediate steps are mostly omitted), and the obsolete Chamberlinian terminology does not exactly promote understanding (obsolete by Austrian university standards, that is).
Consequently I’ve compiled this step-by-step walkthrough of the first and most widely used model (the CES case) covered in Dixit/Stiglitz (1977). This should be sufficient for most of the “new” and “new new” trade theory models. You can download it here.
Please let me know if you find any mistakes.
Update (Dec. 21, 2009): Minor corrections.
- Dixit, Avinash K. and Stiglitz, Joseph E. (1977): “Monopolistic Competition and Optimum Product Diversity”. In: American Economic Review 67(3), 297–308.