《Increasing_returns》.pdf

Job I; I .-)fbnternationai Economics 9 (1979) 469-479. 0 North-Hollan,l Publishing Company INCREASING RETURK§, MONOPOLISTIC COMPETITION, Ah D INTEIRN.QTIOI\;A L TRADE Received November 1978, xvisr.d vxsion rscelved F‘ebruary 1979 This paper develops a simple, general equilibrium model of nonc0mparatii.e advantage trade. Trade is driven by economies of scale, which are internal to firms. Because of the scale economies, markets are imperfectly competitive. Nonetheless, one can show that trade, and gains from trade, wi!l occur. even between countries with identical tastes. technology, and factor endowments. I. Introduction Et has been widely recognized that economies of scale provide an alter- native tn differences in technology or factor endowments as a.n explanation of internatiomd specialization and trade. The role of ‘economies of large scale production’ is a major subtheme in the Work of Ohlin (1933); while some authors, especially Balassa (1967) and Kravis (19711, have argued that scale ecolnomies pl:~y a crucial role in explaining the postwar growth in trade among :he industrial countries. Nonetheless. increasing returns as a cause of trade his rec.:eived relatively little attention from formal trade theory. The main reason for this neglect seems to be that it has appeared difficult to deal with the impiicationr of increasing returns for market