An Extended Linder Model of International Trade

Abstract

The inability of factor endowment theory to explain either intraindustry trade or trade between countries with similar factor endowments leads many trade analysts to focus on demand, rather than supply, as the basis for trade. The theory of differentiated markets, for example, frequently is extended to the analysis of international trade. A model is presented based on geographical product differentiation which directly focuses upon trade as market interactions. The model defines market homogeneity across national boundaries as the basis for international trade. As international markets approach homogeneity, their trade intensity simply becomes a function of distance. According to Linder, international trade caused by market homogeneity but limited by distance is the same thing as intraregional trade. Linder's model, however, does not incorporate the hierarchical flow of goods that is a common feature of trade within a region. This paper extends the Linder model so as to incorporate hierarchical flow, and ...