Trade without "scale effects"
In: The Canadian journal of economics: the journal of the Canadian Economics Association = Revue canadienne d'économique, Band 54, Heft 3, S. 1252-1274
ISSN: 1540-5982
AbstractAcross countries, average incomes are related to population density, but not population per se. At the same time, the number of firms in both manufacturing and services are essentially proportional to population but unrelated to density (controlling for population). Why are these distinctions important? Moving from autarky to free trade is much more like increasing population while keeping density fixed. In this paper, I extend a simple variety model by considering an economy made up of a large number of geographical markets of fixed area. Firms must incur a cost to access each market, and this cost is convex in the number of markets entered. Assuming no firm chooses to access all markets within an economy, increasing both population and the number of markets proportionately has no effect on firms' market access decision and so the number of firms per capita and average incomes remain unchanged. The implications of the model for trade are stark. If two identical countries open up to trade, there are no gains from trade. If two different countries open up to trade but no comparative advantage exists, there are no gains from trade. Countries trade (and gains from trade exist) only if comparative advantage exists. If comparative advantage exists, the gains from trade are lower than in a standard variety model. But if comparative advantage is ignored, the true gains from trade can be much higher than the gains calculated using a standard sufficient‐statistic formula.