Increasing Returns,the Choice of Technology,and the Gains from Trade

This paper studies the implications of international trade in a general equilibrium model in which the returns to scale are internal and firms choose their production technologies. The production function generated from internal increasing returns and the choice of technology leads to returns to scale similar to those based on external increasing returns. Trade always increases a country's welfare in a two-sector model in which the agricultural sector has constant returns to scale and average cost in the manufacturing sector may decrease without being bounded asymptotically by a given level of marginal cost. Why a small country may lose from trade under external increasing returns is also illustrated.