A Ricardian Model of New Trade and Location Theory

This paper provides a new model of firm’s location choices. It integrates a Ricardian model of comparative advantage with the location effects deriving from trade costs, increasing returns to scale, product dif ferentiation, and monopolistic competition. In a two-region, two-differentiated-good, one-factor framework, the regional degree of specialization depends positively on the extent of the comparative advantage in productivity and on the degree of returns to scale; it depends negatively on the magnitude of the trade costs. Hence, the model accommodates high levels of intra-industry trade among countries with similar level of development, as well as high levels of interindustry trade among countries with different technologies.