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External Economies and International Trade Redux

  • Gene M. Grossman

    (Princeton University.)

  • Esteban Rossi-Hansberg

    (Princeton University.)

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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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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