External Economies and International Trade Redux: Comment*

Abstract

Recently in this Journal Grossman and Rossi-Hansberg (2010) proposed a novel way to think about the implications of international trade in the presence of national external economies at the industry level. Instead of perfect competition and two industries, GRH assume Bertrand competition and a continuum of industries. GRH conclude that the equilibrium is unique if transport costs are low, that there is no trade for high transport costs, and that there is no equilibrium in pure strategies when transport costs are intermediate. In this note we reexamine the equilibrium analysis under di¤erent transport costs for a single industry (partial equilibrium) version of GRH's model. We con…rm many of GRH's results, but also …nd that there are circumstances under which there are multiple equilibria, including equilibria in which trade patterns run counter to "natural" comparative advantage, and also …nd that there is a pro…table deviation to the mixed-strategy equilibrium postulated by GRH for intermediate trading costs. We propose an alternative set of strategies for this case and establish that they constitute an equilibrium. JEL code: F10Total word count: 2,807We thank Kalyan Chatterjee, Gene Grossman, Vijay Krishna, Konstantin Kucheryavyy, Esteban RossiHansberg, Adam Slawski, and an anonymous referee for helpful comments. A special thanks also to James Graham-Eagle and Donald Richards for invaluable insights.

Food Trade and Biodiversity Effects

“…Lyn and Rodríguez‐Clare () complete the setup by refining the way transport costs are taken into account.…”