NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

External Economies and International Trade Redux

Gene M. Grossman, Esteban Rossi-Hansberg

NBER Working Paper No. 14425*
Issued in October 2008
NBER Program(s):   EFG    ITI

We study a world with national external economies of scale at the industry level. In contrast to the standard treatment with perfect competition and two industries, we assume Bertrand competition in a continuum of industries. In this setting, many of the "pathologies" of the standard treatment disappear. There typically exists a unique equilibrium with trade guided by "natural" comparative advantage. And, when a country has CES preferences and any finite elasticity of substitution between goods, gains from trade are assured.

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