Globalization, Increasing Returns in Component Production, and the Pattern of Trade

Anu Kovarikova Arro ()

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economic Institute, Prague

Abstract: This paper proposes that globalization, through the enlargement of the market, can influence both specialization and the equilibrium firm size. By re-introducing two factors of production into the muchutilized Dixit-Stiglitz-Ethier framework, I show that gains from specialization depend only on capital, while gains from increasing firm size face a trade-off between labor and capital as the size of the market expands. If the markup that the firms charge is instead endogenously determined, I demonstrate how firms can gain from both internal and external economies as globalization occurs if the number of firms stays under a specified threshold. The paper also shows that opening up to free trade in intermediate inputs and a final consumption good will have relative endowments determining the direction of trade across the stages of production. The model predicts that a relatively capital-abundant country will be the importer of the final good and the net exporter of intermediate components. Compared to autarky, trade will enhance specialization and firm size in the capital-abundant country and diminish both in the laborabundant country. Welfare can either increase or decrease as a result of trade.

Keywords: Monopolistic competition; external and internal economies of scale; trade across the stages of production. (search for similar items in EconPapers)
JEL-codes: F12 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2005-06
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Persistent link: http://EconPapers.repec.org/RePEc:cer:papers:wp265

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