Scale Economies, Input-Output Loops, and Trade
This paper studies the equilibrium and welfare implications of quantitative trade models with sector-level external economies of scale (EES). While empirical evidence highlights the importance of EES, prior work has examined their effects only in models without input-output linkages. Focusing on a small open economy, we derive an intuitive condition for equilibrium uniqueness that links trade elasticities, scale elasticities, and input-output coefficients. We further show that this same condition guarantees positive gains from trade, regardless of a country’s pattern of specialization.
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