External Economies of Scale and Comparative Advantage

Abstract

We investigate the interplay, in international trade, between comparative advantage and increasing returns to scale that are external to the firm. We focus especially on "advantage reversals," where the country with a comparative-cost disadvantage in producing a good nevertheless is able to export it because of the economies of large-scale production. We examine trade policy in such a situation, looking especially at whether that policy should aim at basic policy-regime change.

Keywords: external increasing returns to scale, advantage reversals, size reversals, scale-dominant economy, comparative-cost dominant economy

JEL Classification: F10, F12, F13