Publisher Summary This chapter discusses two major issues: explanations of trade patterns and gains from trade. The classical traditions were mainly concerned with gains from trade and other welfare effects. The theory of international trade is surveyed in the presence of economies of scale and monopolistic competition, with an emphasis on predictions of trade patterns and gains from trade. The main ingredient of this logic is that the allocation of productive resources is guided in every country by the reward level of every sector's employed combination of factors of production. Economies of scale, which arise from conglomeration or public intermediate inputs, seem to be country specific, and due to transportation costs within-industry specialization in some stages of production are countries specific. It seems, therefore, that the size of a domestic industry plays a role in the determination of external economies of scale. But it is also clear that some sources of these scale economies affect more than a single industry, which implies cross-industry spillovers of external economies of scale. The chapter provides an overview on the general model of trade in homogeneous products when there are variable returns to scale and free entry into industries.

Chapter 7 Increasing returns, imperfect markets, and trade theory

Internal versus external economies in European industry

Partially mobile capital: A general approach to two-sector trade theory

This paper develops a method for joint estimation of both the degree of internal returns to scale and the extent of external economies. We apply the method in estimating returns to scale indexes for U.S. manufacturing industries at the two-digit level. Overall, we find that only three of the twenty industry categories show any evidence of internal increasing returns: (1) Primary Metals, (2) Electrical Machinery, and (3) Paper Products. More striking, however, is the very strong evidence of the existence of external economies, where external is defined as external to a given two-digitindustry and internal to the U.S.. According to our preferred estimates, if all manufacturing industries simultaneously raise their inputs by 10%, aggregate manufacturing production rises by 13%, of which about 5% is due to external economies. Thus, when an industry increases its inputs in isolation by 10%, its output rises by no more than 8%.

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The Role of External Economies in U.S. Manufacturing

This paper examines the welfare effects of the reduction of the highest tariffs and the uniform change of all tariffs in a small open economy with public production. Using the restricted GNP and expenditure functions, the author shows that such tariff reforms can improve the welfare of the economy if the public production is initially abundant. A change in the public production, as well as a change in the distortion of tariff structures, is shown to affect the welfare of the economy. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Tariff Reform in a Small Open Economy with Public Production

Production Possibilities and International Trade with a Public Intermediate Good

Further implications of variable returns to scale

This paper undertakes a comparative static analysis in the Harris-Todaro (H-T) model by accommodating local pollution. Unlike in the classical H-T model where migration proceeds in response to urban-rural differences in expected earnings, we consider labor movement taking place according to the difference in utility, which is influenced by the quality of the local environment. The paradoxical result is that an improvement in pollution-abatement technology gives rise to an increase in urban unemployment and has no effect on the workers' aggregate welfare.

Urban Pollution, Unemployment and National Welfare in a Dualistic Economy

International trade with a public intermediate good

Publisher Summary This chapter explains that the set of feasible net production points is convex if the underlying production functions are of the constant returns, no-joints-products type, and if there are no technological externalities. However, the upper boundary of the set, that is, the transformation surface, is not necessarily strictly concave; it may contain linear segments or, more generally, flats of dimension possibly greater than one. Recently, it has been shown that the degree of flatness is related to the rank of the matrix of primary factor inputs. It has been shown that if at any point P in the transformation surface, there are s industries active, then the surface contains an (s-r)-dimensional flat embracing P if and only if at P there are exactly r linearly independent vectors of primary-factor inputs. As corollary, if the number of primary factors is less than s, then P necessarily lies in a flat of dimension at least one.

Makoto Tawada

Papers

Production Possibilities and International Trade with a Public Intermediate Good

Further implications of variable returns to scale

Urban Pollution, Unemployment and National Welfare in a Dualistic Economy

International trade with a public intermediate good

The Production Possibility Set with Public Intermediate Goods