Producer Services, Comparative Advantage, and International Trade Patterns

Abstract

We unite the theories of factor abundance and monopolistic competition to explore the general equilibrium relations between trade in producer services, economies of scale and factor markets. In our model, two final goods are produced using capital, labor, and a variety of differentiated producer services that are produced under increasing returns to scale. We analyze the implications for comparative advantage and trade in goods between two countries that differ in factor endowments and in technology of service provision. Moreover, we use the concept of the integrated world equilibrium to investigate trade in goods and services, also when services require foreign direct investments.