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Scale Economies, Intra-Industry Trade And Industry Location In The "New Trade Theory"

Listed author(s):
  • Marius Brülhart

This paper exposes some common misinterpretations of the "new trade theory". First, the view that high scale economies give rise to high levels of intra-industry trade is challenged. It is shown that the monopolistic-competition trade model predicts a negative relationship between internal scale economies and intra-industry trade. Second, in spite of a common perception that the "new" theory explains ever growing levels of intra-industry trade in an integrating world economy, a scrutiny of the basic model indicates that reduced distance costs result in lower intra-industry trade. However, if temporary re-location rigidities are considered, integration entails an initial surge of intra-industry trade, which eventually withers away, when the centripetal forces towards inter-industry specialisation take over. This might contribute towards an explanation for observed reversals of intra-industry trade growth among industrial countries.

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Paper provided by Trinity College Dublin, Department of Economics in its series Economics Technical Papers with number 954.

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Date of creation: 1995
Handle: RePEc:tcd:tcduet:954
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