The Effects of Relative Country Size and Endowment Similarity in Influencing Trade Volume and Composition in General Equilibrium Monopolistically Competitive Markets

Robert C. Shelburne, United Nations Economic Commission for Europe

Abstract

In order to explain two-way trade, the standard H-O model has recently been modified by assuming a market structure with monopolistic competition. The factors that affect the volume of total trade and its intra-industry component in the 2 x 2 model have been specified in these papers. This paper generalizes these results to the N-good, M-country case. Although endowment similarity increases the intra-industry component in the 2 x 2 case, this proposition does not strictly hold for bilateral trade in the N x M case. Similarity of relative income size (GNP) does increase intra-industry trade in the 2 x 2 case, but does not increase the intra-industry share as assumed by several authors. In the N x M case, similarity of relative income size does not affect the bilateral volume of intra-industry trade nor its intra-industry share. This article thus shows that ceteris paribus comparative static changes in income size in a 2-country model are not equivalent to changes in that variable across a cross-section of a multi-country model.