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Published: 21-12-2012, 07:42

New Trade Theory

New Trade Theory: Reasons for Developing New Trade Theory

New Trade Theory: Explaining Intraindustry Trade

New Trade Theory: Topics in New Trade Theory

New Trade Theory is the descriptive term for theories that assume imperfect competition and increasing returns to scale (internal scale economies at the firm level) in order to explain international trade. In contrast, traditional trade theories, such as the Ricardian or the Heckscher-Ohlin model, assume perfect competition and constant returns to scale, and attribute the emergence of international trade to cross-country opportunity cost differences (i.e., comparative cost advantage) caused by either differences in productiontechnology (Ricardianmodel) or factor endowments (Heckscher-Ohlin model).

See also comparative advantage; economies of scale; foreign direct investment (FDI); foreign direct investment: the OLI framework; gains from trade; Heckscher-Ohlin model; intraindustry trade; monopolistic competition; New Economic Geography; oligopoly; Ricardian model


  • Antras, Pol. 2003. ‘‘Firms, Contracts, and Trade Struc ture.’’ Quarterly Journal of Economics 118 (4): 1375 1418. Integrates incomplete contracting model of firm boundaries into monopolistic competition trade model. 
  • Brander, James A. 1981. ‘‘Intraindustry Trade in Identical Commodities.’’ Journal of International Economics 11 (1): 1 14. Shows how intraindustry trade in homoge neous goods can arise in segmented oligopoly markets. 
  • Brander, James A., and Paul R. Krugman. 1983. ‘‘A ‘Re ciprocal Dumping Model’ of International Trade.’’ Journal of International Economics 15 (3 4): 313 21. Discusses price discrimination and reciprocal dumping in segmented oligopoly markets. 
  • Dixit, Avinash K., and Joseph E. Stiglitz. 1977. ‘‘Mono polisticCompetition andOptimumProduct Diversity.’’ American Economic Review 67 (3): 297 308. Develops model of monopolistic competition and differentiated goods. 
  • Dunning, John H. 1988. Explaining International Produc tion. London: Unwin Hyman. Lays out the eclectic paradigm, also known as OLI theory, for explaining multinational enterprises. 
  • Fujita,Masahisa, Paul Krugman, and Anthony J. Venables. 1999.TheSpatial Economy.Cambridge,MA:MITPress. A book length treatment of the NewEconomic Geogra phy, which analyzes the causes for spatial economic ag glomeration in a general equilibrium framework. 
  • Grossman, Gene M., and Elhanan Helpman. 1991. In novation and Growth in the Global Economy.Cambridge, MA: MIT Press. A book length treatment of the New Growth Theory, which considers intentional techno logical innovation as the driving force behind economic growth.
  •  . 2002. ‘‘Integration versus Outsourcing in Industry Equilibrium.’’ Quarterly Journal of Economics 117 (1): 85 120. Discusses firms’ integration versus outsourcing choice in transaction cost setting. 
  • Helpman, Elhanan, and Paul R. Krugman. 1985. Market Structure and Foreign Trade. Cambridge, MA: MIT Press. Combines Heckscher Ohlin model with mo nopolistic competition and differentiated goods model and discusses the impact on trade volumeand gains from trade.
  •  . 1989. Trade Policy and Market Structure. Cam bridge, MA: MIT Press. Discusses impact of imperfect competition on optimal trade policy. 
  • Krugman, Paul R. 1979. ‘‘IncreasingReturns,Monopolistic Competition, and International Trade.’’ Journal of In ternational Economics 9 (4): 469 79. Shows gains from trade in monopolistic competition model. 
  • . 1980. ‘‘Scale Economies, Product Differentiation, and the Pattern of Trade.’’American Economic Review 70 (5): 950 59. Introduces transportation costs and home market effects into monopolistic competition model. 
  • . 1981. ‘‘Intraindustry Specialization and the Gains from Trade.’’ Journal of Political Economy 89 (5): 959 73. Discusses determinants of intra vs. interindustry trade in monopolistic competition model. 
  • Markusen, James R. 2002. Multinational Firms and the Theory of International Trade. Cambridge, MA: MIT Press. A book length treatment of the theory of multi national firms under oligopoly and monopolistic com petition. 
  • Melitz, Marc J. 2003. ‘‘The Impact of Trade on Intra Industry Reallocations and Aggregate Industry Pro ductivity.’’ Econometrica 71 (6): 1695 1725. Provides a model of firms’ exporting choice in a monopolistic competition framework.
  •  Rivera Batiz, Luis A., and Maria Angels Oliva. 2003. In ternational Trade. Oxford: Oxford University Press. A comprehensive textbook on international trade with large part devoted to newliterature, in particular ontrade policy. 


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