Communications networks and virtual economic integration: The case of three countries

This paper proposes a three-country model of trade that captures the role of communications networks which enhance trade in business services. The interconnectivity of country-specific networks is found to determine the structure of comparative advantage in the good that requires business services provided via networks. In connected countries, producers of that good benefit from the growing connectivity of business services providers. It is also shown that the third country which is unconnected to the interconnected networks may be worse off from trade.The first author is grateful for the support of the Telecommunications Advancement Foundation.