Marshallian External Economies in International Trade

Abstract

Ethier (1982) showed that in the presence of increasing returns to scale due to Marshallian externality a large country always gains from trade while under a certain condition a small country loses from trade at the trading equilibrium. In this paper we show that, even if Ethier's assumptions are relaxed, his main results still hold, and we further derive a necessary and sufficient condition for a small country to lose from trade. Moreover it is shown that the total world endowment of productive factor as well as the relative size of each country's factor endowment is important for the above necessary and sufficient condition in other cases than those which Ethier considered.