Abstract
A direct comparison is made between two models of intra-industry trade: the love-of-varieties model and the Armington model. The former is a textbook model that is theoretically appealing, but seldom used in applied studies of trade policy. The latter has been widely used in CGE modelling, but is barely mentioned in textbooks. We find that what really differentiates the two models empirically is not the incorporation of increasing returns and monopolistic competition, but the elasticity of substitution between domestic and foreign differentiated products. The Armington model with an infinite elasticity of substitution can mimic the love-of-varieties model.
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