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Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale

Author

Listed:
  • Konstantin Kucheryavyy
  • Gary Lyn
  • Andrés Rodríguez-Clare

Abstract

Although economists have long been interested in the implications of Marshallian externalities (i.e., industry-level external economies of scale) for trading economies, the large number of equilibria that they typically imply has kept such externalities out of the recent quantitative trade literature. This paper presents a multi-industry trade model with industry-level economies of scale that nests a Ricardian model with Marshallian externalities as well as multi-industry versions of Krugman (1980} and Melitz (2003). The behavior of the model depends on two industry-level elasticities: the trade elasticity and the scale elasticity. We show that there is a unique equilibrium if the product of the trade and scale elasticities is weakly lower than one in all industries. The welfare analysis reveals that if this condition is satisfied then all countries gain from trade, even when the scale elasticity varies across industries. The presence of scale economies tends to lower the gains from trade except if the country specializes in industries with relatively high scale elasticities. On the other hand, scale economies amplify the gains from trade liberalization except if it leads to reallocation towards industries with relatively low scale elasticities.

Suggested Citation

  • Konstantin Kucheryavyy & Gary Lyn & Andrés Rodríguez-Clare, 2016. "Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale," NBER Working Papers 22484, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22484
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    References listed on IDEAS

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    Cited by:

    1. Keith Head & Thierry Mayer, 2019. "Brands in Motion: How Frictions Shape Multinational Production," American Economic Review, American Economic Association, vol. 109(9), pages 3073-3124, September.
    2. Luca David Opromolla & Lorenzo Caliendo & Fernando Parro & Alessandro Sforza, 2017. "Goods and Factor Market Integration: A Quantitative Assessment of the EU Enlargement," Working Papers w201717, Banco de Portugal, Economics and Research Department.
    3. Simon Fuchs, 2018. "The Spoils of War: Trade Shocks during WWI and Spain’s Regional Development," 2018 Meeting Papers 1172, Society for Economic Dynamics.
    4. Rodrigo Adão & Costas Arkolakis & Federico Espósito, 2019. "Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence," Cowles Foundation Discussion Papers 2163, Cowles Foundation for Research in Economics, Yale University.

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    JEL classification:

    • F10 - International Economics - - Trade - - - General

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