Working Paper: NBER ID: w14425
Authors: Gene M. Grossman; Esteban Rossi-Hansberg
Abstract: 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. In this setting, many of the "pathologies" of the standard treatment disappear. 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 assured.
Keywords: external economies; international trade; Bertrand competition; comparative advantage
JEL Codes: F1; F11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| external economies (F69) | trade outcomes (F10) |
| external economies (F69) | welfare (I38) |
| Bertrand competition (L13) | unique equilibria (C62) |
| country size (R12) | comparative advantage (F11) |
| external economies (F69) | improved trade outcomes (F19) |
| external economies (F69) | positive welfare implications of trade (F10) |
| pattern of specialization (F12) | comparative advantage (F11) |