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External Economies and International Trade Redux

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  • Gene M. Grossman

    (Princeton University.)

  • Esteban Rossi-Hansberg

    (Princeton University.)

Abstract

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. With Bertrand competition, each firm can internalize the externalities from production by setting a price below those set by others. This out-of-equilibrium threat eliminates many of the "pathologies" of the standard treatment. 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 ensured. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 125 (2010)
Issue (Month): 2 (May)
Pages: 829-858

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Handle: RePEc:tpr:qjecon:v:125:y:2010:i:2:p:829-858

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  1. Henderson, J V, 1974. "The Sizes and Types of Cities," American Economic Review, American Economic Association, vol. 64(4), pages 640-56, September.
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  5. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Task Trade between Similar Countries," NBER Working Papers 14554, National Bureau of Economic Research, Inc.
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  10. Choi, Jai-Young & Yu, Eden S H, 2002. "External Economies in the International Trade Theory: A Survey," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 708-28, November.
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Citations

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Cited by:
  1. Neary, J. Peter, 2009. "Two and a Half Theories of Trade," CEPR Discussion Papers 7600, C.E.P.R. Discussion Papers.
  2. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Task Trade between Similar Countries," NBER Working Papers 14554, National Bureau of Economic Research, Inc.
  3. Arnaud Costinot & Jonathan Vogel & Su Wang, 2013. "An Elementary Theory of Global Supply Chains," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 109-144.
  4. Colacicco, Rudy, 2012. "The "Average" Within-Sector Firm Heterogeneity in General Oligopolistic Equilibrium," MPRA Paper 40212, University Library of Munich, Germany.
  5. Wagner, Rodrigo & Zahler, Andrés, 2011. "New exports from emerging markets: do followers benefit from pioneers ?," MPRA Paper 30312, University Library of Munich, Germany.
  6. Kwok Tong Soo, 2013. "The gains from the division of labour and comparative advantage," Working Papers 33867696, Lancaster University Management School, Economics Department.
  7. Krzysztof Makarski, 2012. "Division of Labour and Innovation with Indivisibilities: Lessons from A. Smith," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 43(6), pages 7-28.
  8. Leahy, Dermot & Neary, J Peter, 2010. "Oligopoly and Trade," CEPR Discussion Papers 8172, C.E.P.R. Discussion Papers.
  9. Benz, Sebastian & Kohler, Wilhelm, 2011. "Managerial versus production wages: Offshoring, country size and endowments," University of Tuebingen Working Papers in Economics and Finance 13, University of Tuebingen, Faculty of Economics and Social Sciences.
  10. Virginia Di Nino & Barry Eichengreen & Massimo Sbracia, 2011. "Real Exchange Rates, Trade, and Growth: Italy 1861-2011," Quaderni di storia economica (Economic History Working Papers) 10, Bank of Italy, Economic Research and International Relations Area.
  11. Kwok Tong Soo, 2014. "The gains from external scale economies and comparative advantage," Economics Bulletin, AccessEcon, vol. 34(1), pages 84-88.

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