Permalink : http://hdl.handle.net/2115/14859

KEYWORDS : Intra-industry trade;Multinational firms;Wage differentials;Market size;Trade costs;Trade policies

This paper investigates the patterns of trade and effects of trade policies in a manufacturing industry whose market is monopolistically competitive. Solving the equilibrium solutions explicitly, we show the existence of relative fixed costs, which divide patterns of trade into either a regime with intra-industry trade or active multinational firms. Moreover, it is found that both intra-industry trade and activities by multinational firms are determined by wage differentials, market size, trade costs and relative fixed costs. Thus, politically changing any of these factors may affect both trade patterns and intra-industry trade or multinational activities. (JEL F23, F11)