Explaining the Volume of Trade: An Eclectic Approach

Divide the world into a capital-abundant North and a labor-abundant South. Subdivide the North into two identical regions, East and West.Modern trade theory predicts intraindustry trade in differentiated manufactured goods between East and West, and traditional interindustry trade based on factor endowments between North and South. But the theory offers no conclusions about the volume of trade , and gives no real role to demand in determining trade flows. The model developed here explains both the volume and the direction of trade by combining nonhomothetic preferences with scale economies and differences in endowments. Copyright 1986 by American Economic Association.