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Explaining the volume of intraindustry trade: are increasing returns necessary?

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  • Donald R. Davis

Abstract

The recent theoretical literature has suggested that increasing returns to scale are necessary to account for the volume of intraindustry trade among developed economies. The present paper shows that such trade can arise quite naturally in a setting with constant returns to scale. ; An example is developed with "perfectly-intraindustry goods," in which countries with identical endowments and arbitrarily small technical differences nonetheless trade substantial amounts of goods of identical factor intensity. This is extended to a case with factor price equalization, fully determinate trade and the possibility of substantial intraindustry trade. Finally, we develop the simplest possible model that can give a unified account of interindustry and intraindustry trade, while allowing a straightforward comparison with standard Heckscher-Ohlin results. A striking feature of the last example is that intraindustry trade attains a maximum at a point where countries have identical factor endowment ratios. ; Increasing returns, in short, are not necessary to explain intraindustry trade.

Suggested Citation

  • Donald R. Davis, 1991. "Explaining the volume of intraindustry trade: are increasing returns necessary?," International Finance Discussion Papers 411, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:411
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1991/411/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1991/411/ifdp411.pdf
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    References listed on IDEAS

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    1. Chang, Winston W, 1979. "Some Theorems of Trade and General Equilibrium with Many Goods and Factors," Econometrica, Econometric Society, vol. 47(3), pages 709-726, May.
    2. Jones, Ronald W. & Peter Neary, J., 1984. "The positive theory of international trade," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 1, pages 1-62 Elsevier.
    3. Ethier, Wilfred J., 1984. "Higher dimensional issues in trade theory," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 3, pages 131-184 Elsevier.
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    Cited by:

    1. Robert C. Feenstra & Tzu-Han Yang & Gary G. Hamilton, 1993. "Market Structure and International Trade: Business Groups in East Asia," NBER Working Papers 4536, National Bureau of Economic Research, Inc.

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    Keywords

    International trade;

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