A New Dynamic Trade Model of Increasing Returns and Monopolistic Competition

This paper formulates a two‐country by two‐factor by two‐good dynamic Chamberlin–Heckscher–Ohlin model of international trade with endogenous time preferences. After proving the existence, uniqueness and local saddle‐point stability of the steady state, we examine the relationship between initial factor endowment and trade patterns in the steady state. It will be shown that (i) given that the representative household in each country supplies an equal amount of labor, only intra‐industry trade occurs in the steady state and (ii) other things being equal, the country with higher labor efficiency becomes the net exporter of the labor‐intensive good.