Increasing Returns and All that: A View from Trade

Abstract

Do scale economies contribute to our understanding of international trade? Do international trade flows encode information about the extent of scale economies? To answer these questions we examine the large class of general equilibrium theories that imply Helpman-Krugman variants of the Vanek factor content prediction. Using an ambitious database on output, trade flows, and factor endowments, we find that scale economies significantly increase our understanding of the sources of comparative advantage. Further, the Helpman-Krugman framework provides a remarkable lens for viewing the general equilibrium scale elasticities encoded in trade flows. In particular, we find that a third of all goods-producing industries are characterized by scale. (The modal range of scale elasticities for this group is 1.10-1.20 and the economy-wide scale elasticity is 1.05.) Implications are drawn for the trade-and-wages debate (skill-biased scale effects) and endogenous growth.