Decreasing Marginal Cost and the Pattern of Trade

Current trends in the pure theory of trade are mainly concerned with the Heckscher-Ohlin factor endowment analysis. But the literature exploring and refining the H-O model has largely ignored variable returns to scale by assuming a linear homogeneous production function. The notable exception is the work of Kemp [2, pp. 110–129].1 Kemp, however, limits his exploration to an aspect of decreasing marginal cost, i.e. increasing returns (to scale) where all physical inputs are increased in the same proportion with consequent more than proportional increase in output. But it is well known that decreasing marginal cost may result either from increasing returns to scale or, when some factor is fixed while others are variable, from operation in early portion of stage I of production (where MVP and AVP are rising). His and other writers’ omission of the distinction between the two (to be labelled type A for the former and type B for the latter) leaves the problem of increasing returns in international trade theory still at the point of Tinbergen’s version of Graham’s theory [4] which also falls short in clarifying these two types.