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1、Feenstra,AdvancedInternationalTradeChapter5:IncreasingReturnsandtheGravityEquationInthischapter,wemakeasignificantdeparturefromearliertrademodelsbyallowingforincreasingreturnstoscale.TheideathatincreasingreturnsmightbeareasonfortradebetweencountrieswaswellrecognizedbyBertilOhlin(19
2、33)andalsoFrankGraham(1923),andhas1beenthemotivationforpolicyactions.InCanada,forexample,extensivepolicydiscussionsinthe1960sarguedthatCanadianfirmswouldbenefitfromunrestrictedaccesstotheU.S.market.ItwasbelievedthattheCanadianmarketwastoosmalltoallowmanufacturingindustriestooperate
3、ataminimumefficientscale,andthatwithaccesstotheU.S.market,firmscouldmove2downtheiraveragecostscurves,whichisagaininefficiency.Indeed,thiswasaprincipalreasonthatCanadaenteredinafreetradeagreementwiththeUnitedStatesin1989:togiveitsfirmsfreeaccesstothelargeAmericanmarket.Aspromisingas
4、thislineofargumentis,however,itcontainsapuzzle:asfirmsinCanadaandtheU.S.movedowntheiraveragecostcurvesduetoaccesstotheothermarket,surelynotallfirmscanexpandoutputthatmuch,sincewhowouldbuyit?Thus,anexpansionbysomefirmsseemstosuggestthatotherswillneedtoexitthemarketentirely.Soweneeda
5、modeltosortoutthesevariouseffects.Themodelthatismostsuitedtothispurposeisoneofmonopolisticcompetition:amarketwithalargenumberoffirms,eachproducingauniquevarietyofadifferentiatedproduct,withfreedomofentryandexit.ThismodeldatesbacktoEdwardChamberlin(1936)andJoanRobinson(1933)whoprese
6、ntedgraphicalanalyses.Thewidespreaduseofthismodelhadtowaitforamathematicalformulation,however,whichwasachievedbyLancaster(1975,1979),1Graham(1923)arguedthattradeduetoincreasingreturnstoscalemightbeanargumentforprotection,i.e.thatonecountrycouldlosefromtrade.Ethier(1982)analyzedamod
7、elofthissort,relyingonincreasingreturnsthatareexternaltothefirm.Inthischapterwewillfocusexclusivelyonincreasingreturnsthatareinternaltothefirm.2See,forexample,EastmanandStykolt(1960,1967).5-2Feenstra,AdvancedInternationalTradeSpence(1976),andDixitandStiglitz(1977).Lancasterpresente
8、damodelinwhichconsumersdif
