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Increasing Returns, Product Quality and International Trade


  • C. Simon Fan


This paper examines the roles of quality and increasing returns in trade. It implies that there is intense intra-industry trade among economies with similar levels of per capita income, which increases both the quality and the quantity of consumption. However, there may be no trade in manufactured goods between rich and poor countries because of the disparity in their optimal qualities of consumption and the high complementarity of the qualities of intermediate goods in production. Thus, it helps explain the observed trade patterns. Moreover, the model shows that a smaller country is more likely to engage in international trade. Copyright (c) The London School of Economics and Political Science 2005.

Suggested Citation

  • C. Simon Fan, 2005. "Increasing Returns, Product Quality and International Trade," Economica, London School of Economics and Political Science, vol. 72(285), pages 151-169, February.
  • Handle: RePEc:bla:econom:v:72:y:2005:i:285:p:151-169

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    References listed on IDEAS

    1. Benito, Andrew & Garry Young, 2002. "Financial Pressure and Balance Sheet Adjustment by UK Firms," Royal Economic Society Annual Conference 2002 20, Royal Economic Society.
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    Cited by:

    1. C. Simon Fan & Yifan Hu, 2006. "A Signaling Model of Quality and Export: with application to dumping," DEGIT Conference Papers c011_058, DEGIT, Dynamics, Economic Growth, and International Trade.
    2. repec:bla:ecorec:v:93:y:2017:i:302:p:434-447 is not listed on IDEAS
    3. Liao, Chi-Hung, 2011. "Measuring quality in international trade," Economic Systems, Elsevier, vol. 35(1), pages 125-138, March.
    4. Shi, Hui, 2012. "The efficiency of government promotion of inbound tourism: The case of Australia," Economic Modelling, Elsevier, vol. 29(6), pages 2711-2718.
    5. BOJNEC, Stefan & FERTO, Imre, 2009. "Determinants of agro-food trade competition of Central European countries with the European Union," China Economic Review, Elsevier, vol. 20(2), pages 327-337, June.
    6. Roberto Álvarez & Sebastián Claro, 2006. "The China Phenomenon: Price, Quality or Variety?," Working Papers Central Bank of Chile 411, Central Bank of Chile.
    7. Hasan Faruq, 2006. "New Evidence on Product Quality and Trade," Caepr Working Papers 2006-019, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

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