NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale

Konstantin Kucheryavyy, Gary Lyn, Andrés Rodríguez-Clare

NBER Working Paper No. 22484
Issued in August 2016
NBER Program(s):International Trade and Investment

Although economists have long been interested in the implications of Marshallian externalities (i.e., industry-level external economies of scale) for trading economies, the large number of equilibria that they typically imply has kept such externalities out of the recent quantitative trade literature. This paper presents a multi-industry trade model with industry-level economies of scale that nests a Ricardian model with Marshallian externalities as well as multi-industry versions of Krugman (1980} and Melitz (2003). The behavior of the model depends on two industry-level elasticities: the trade elasticity and the scale elasticity. We show that there is a unique equilibrium if the product of the trade and scale elasticities is weakly lower than one in all industries. The welfare analysis reveals that if this condition is satisfied then all countries gain from trade, even when the scale elasticity varies across industries. The presence of scale economies tends to lower the gains from trade except if the country specializes in industries with relatively high scale elasticities. On the other hand, scale economies amplify the gains from trade liberalization except if it leads to reallocation towards industries with relatively low scale elasticities.

download in pdf format
   (770 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22484

Users who downloaded this paper also downloaded* these:
Waugh and Ravikumar w22147 Measuring Openness to Trade
Redding and Weinstein w22479 Measuring Aggregate Price Indexes with Demand Shocks: Theory and Evidence for CES Preferences
Kehoe, Pujolas, and Ruhl w22514 The Opportunity Costs of Entrepreneurs in International Trade
Fort w22550 Technology and Production Fragmentation: Domestic versus Foreign Sourcing
Mayer, Melitz, and Ottaviano w22433 Product Mix and Firm Productivity Responses to Trade Competition
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us