External economies and international trade redux

Gene M. Grossman, Esteban Rossi-Hansberg

Research output: Contribution to journalArticlepeer-review

34 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)829-858
Number of pages30
JournalQuarterly Journal of Economics
Issue number2
StatePublished - May 2010

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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