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External Economies and International Trade Redux

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  • 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. 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.

Suggested Citation

  • Gene M. Grossman & Esteban Rossi-Hansberg, 2010. "External Economies and International Trade Redux," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(2), pages 829-858.
    • Handle: RePEc:oup:qjecon:v:125:y:2010:i:2:p:829-858.
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    File URL: http://hdl.handle.net/10.1162/qjec.2010.125.2.829
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    JEL classification:

    • F1 - International Economics - - Trade
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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