Abstract
There are two principal theories of why countries trade: comparative advantage and increasing returns to scale. Which is most important in practice? The large volume of intra‐OECD trade is frequently cited as critical evidence on this question. It is argued that comparative advantage, unlike scale economies, is incapable of accounting for the large volume of trade between seemingly similar economies. This is a theoretical claim. In this paper. I show that it is possible to give an account of this trade based on comparative advantage. The elements that may give rise to a large volume of North‐North trade are traced to identifiable features of technology and endowments.
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