The structure of international trade

Abstract

Introduction Untill recently, the modern literature on geography and trade paid relatively little attention to the relationship between agglomerating and spreading forces on the one hand and the structure and volume of (international) trade on the other. International trade flows are undoubtedly largely determined by the spatial distribution of economic activity. Taking the core (symmetric) two-country model of chapters 3 and 4 as a point of departure, the predictions on the structure and size of trade flows are simple. If economic activity is evenly spread, food is not traded internationally, so there is only intra-industry trade of manufactures between the two countries. If there is complete agglomeration of manufacturing activity, the only other possible long-run outcome, there is exclusively inter-industry trade (food for manufactures) between the two countries. Although these basic predictions are in line with empirical observations, that is trade is large between similar countries and dominated by intra-industry trade (see Box 9.1), the basic structure is too extreme in its predictions and too rigid in structure to allow for different types of international trade flow. The objective of this chapter is to demonstrate how international trade models may be combined with the geographical economics structure to allow for a diversified and rich explanation of international interactions. In doing so it partially fills the gap in the literature observed by Bertil Ohlin in 1933, namely the need to develop a theory of location which may serve as a background for a theory of international trade; see chapter 1.