A monopolistic-competition model of international trade with external economies of scale

This paper presents a two-country model of monopolistic competition in which differentiated products are produced subject to external economies of scale and two countries differ only in size measured by the factor endowment. It is shown that under free trade, the larger country has positive net exports of differentiated products, which leads to its gains from trade, while the smaller country may lose from trade. Noteworthy is that the industrial agglomeration induced by inter-industry trade is possibly harmful to both countries if the two countries are similar in size and the taste for product diversity is sufficiently strong.