International Trade Theory and Policy
by Steven M. Suranovic

Trade 80-4

Some Noteworthy Features of the Simple Economies of Scale Model

Some features of the economies of scale model make it very different from the other models of trade such as the Ricardian or Heckscher-Ohlin models. For example, it is possible to show that countries which are identical in every respect might nevertheless find it advantageous to trade. Thus, it is not always differences between countries that stimulates trade. In this case it is a feature of the production process (i.e. economies of scale) which makes trade gains possible.

Secondly, this economies of scale model cannot predict which country would export which good. It doesn't matter which country produces all of the economies of scale good. As long as one country does so, and trades it with the rest of the world, trade gains are possible. Also it may not matter whether your country ends up producing the economies of scale good or not because both countries will realize the benefits as long as an appropriate terms of trade arises.

Despite these differences with other models, the main similarity is that gains from trade arise because of an improvement in productive efficiency. By reallocating resources between industries within countries it is possible to produce more output with the same amount of resources. This remains the prime motivation in support of free trade.

International Trade Theory and Policy - Chapter 80-4: Last Updated on 2/15/07