T h s paper presents a theoretical analysis of the "Dutch Disease": the phenomenon whereby a boom in one traded goods sector squeezes profitability in other traded goods sectors, both by directly bidding resources away from them and by placing upward pressure on the exchange r a t e . The effects of such a boom on. resource allocation and income distribution are studied in a variant of the "Australian" model of a small open economy, under different assumptions about the degree of intersectoral factor mobility.

We present a new model of multi-product …rms (MPFs) and ‡exible manufacturing and explore its implications in partial and general equilibrium. International trade integration a¤ects the scale and scope of MPFs through a competition e¤ect and a demand e¤ect. We demonstrate how MPFs adjust in the presence of single-product …rms and in heterogeneous industries. Our results are in line with recent empirical evidence and suggest that MPFs in conjunction with ‡exible manufacturing play an important role in the impact of international trade on product diversity.

A two-country model of oligopoly in general equilibrium is used to show how changes in market structure accompany the process of trade and capital market liberalisation. The model predicts that bilateral mergers in which low-cost firms buy out higher-cost foreign rivals are profitable under Cournot competition. With symmetric countries, welfare may rise or fall, though the distribution of income always shifts towards profits. The model implies that trade liberalisation can trigger international merger waves, in the process encouraging countries to specialise and trade more in accordance with comparative advantage. JEL: F10, F12, L13