Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale

Konstantin Kucheryavyy, Gary Lyn and Andres Rodriguez-Clare

No 22484, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Although economists have long been interested in the implications of Marshallian externalities (i.e., industry-level external economies of scale) for trading economies, the large number of equilibria that they typically imply has kept such externalities out of the recent quantitative trade literature. This paper presents a multi-industry trade model with industry-level economies of scale that nests a Ricardian model with Marshallian externalities as well as multi-industry versions of Krugman (1980} and Melitz (2003). The behavior of the model depends on two industry-level elasticities: the trade elasticity and the scale elasticity. We show that there is a unique equilibrium if the product of the trade and scale elasticities is weakly lower than one in all industries. The welfare analysis reveals that if this condition is satisfied then all countries gain from trade, even when the scale elasticity varies across industries. The presence of scale economies tends to lower the gains from trade except if the country specializes in industries with relatively high scale elasticities. On the other hand, scale economies amplify the gains from trade liberalization except if it leads to reallocation towards industries with relatively low scale elasticities.

JEL-codes: F10 (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-geo and nep-int
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Published as Konstantin Kucheryavyy & Gary Lyn & Andrés Rodríguez-Clare, 2023. "Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale," American Economic Journal: Macroeconomics, vol 15(2), pages 372-412.

Downloads: (external link)
http://www.nber.org/papers/w22484.pdf (application/pdf)

Related works:
Journal Article: Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:22484

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w22484

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().