Scale Economics and the Volume of Trade

Scale Economics And The Volume Of Trade Name: Institution: Date: Harrigan, J. (1994). Scale economics and the volume of trade. The review of economics and statistics, 76(2):321-328. In “Scale economics and the volume of trade,” James Harrigan proposes the use of a monopolistic competition model to show the relationship between scale economics and volume of trade, which in turn facilitates understanding intra -industry trade. There is consensus that scale economies influences volume of trade and the monopolistic competition model explains occurrence of intra industry trade. The monopolistic model is contrary to comparative advantage where perfect competition and constant returns to scale could not identify the reason for intra industry trade. The monopolistic competition model states that the production of goods in an industry in any country aims to satisfy the needs of their consumers and hence focuses on economies of scales. Previous models of monopolistic competition including the Grubel-Lloyd index do not explain how intra trade occurs as there is little emphasis on cross-country trade (Harrigan, 1994). This then means t...