External Economies and International Trade Redux
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.
We thank Arnaud Costinot, Angus Deaton, Elhanan Helpman, Marc Melitz and Giovanni Maggi for discussions and the National Science Foundation (under grant SES 0451712) and Sloan Foundation for research support. Any opinions, findings, and conclusions or recommendations expressed in this paper are those of the authors and do not necessarily reflect the views of the National Science Foundation nor the National Bureau of Economic Research, or those of any other organization.
Gene M. Grossman & Esteban Rossi-Hansberg, 2010. "External Economies and International Trade Redux," The Quarterly Journal of Economics, MIT Press, vol. 125(2), pages 829-858, May. citation courtesy of