DECREASING COSTS IN INTERNATIONAL TRADE AND FRANK GRAHAM'S ARGUMENT FOR PROTECTION

Wilfred J. Ethier

Chapter 3 in The Floating World:Issues in International Trade Theory, 2014, pp 27-52 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Over half a century ago Frank Graham argued that decreasing costs could justify protection. Although this contention stimulated a huge literature, a correct analysis has never been made. The present paper attempts to fill this gap. It is shown that Graham's case applies to trade between approximately equally-sized economies and that a greater degree of increasing returns actually reduces its likelihood. Furthermore, increasing returns yield a positive analysis nearly completely symmetric to that of Ricardian constant costs. A new analytical tool, the allocation curve, is introduced, with which Marshallian stability is fully analogous to Walrasian instability with offer curves.

Keywords: International Trade; Scale Economies; Factor Endowments; Political Economy of Trade Policy; Economic Integration (search for similar items in EconPapers)
Date: 2014
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