New trade theory converges to the old trade theory—An elementary theoretical perspective

Abstract

We introduce factor specificity to reflect the cost of adjustment of reallocating factors between technologies that determine fixed costs and variable costs in a typical Dixit–Stiglitz–Krugman (DSK) model of trade, retaining all other standard specifications of such a framework. We show that such an apparently benign change fundamentally alters the results of the DSK model. The number of varieties and output per variety depends entirely on full employment conditions. Thus, DSK and Heckscher–Ohlin–Samuelson (HOS) models, which represent the major workhorses of old trade theory, converge in the sense that now the number of varieties and outputs per variety are completely determined by factor endowments.