Increasing returns and all that: A view from trade

Do scale economies help to explain international trade flows? Using a large database on output, trade flows, and factor endowments, we find that allowing for the presence of increasing returns to scale in production significantly increases our ability to predict international trade flows. In particular, using trade data, we find that a third of all goods-producing industries are characterized by increasing returns to scale. Thus, scale economies are a quantifiable and important source Of comparative advantage.