External Economies and International Trade Redux

Grossman, Gene M.; Rossi-Hansberg, Esteban

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External Economies and International Trade Redux

NBER Working Paper No. w14425

20 Pages Posted: 23 Oct 2008 Last revised: 2 Dec 2022

See all articles by Gene M. Grossman

Gene M. Grossman

Princeton University - Princeton School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Esteban Rossi-Hansberg

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 2008

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.

Suggested Citation: Suggested Citation

Grossman, Gene M. and Rossi-Hansberg, Esteban A., External Economies and International Trade Redux (October 2008). NBER Working Paper No. w14425, Available at SSRN: https://ssrn.com/abstract=1288424