Increasing returns, product quality and international trade

This paper examines the roles of quality and increasing returns in trade. It implies that there is intense intra-industry trade among economies with similar levels of per capita income, which increases both the quality and the quantity of consumption. However, there may be no trade in manufactured goods between rich and poor countries because of the disparity in their optimal qualities of consumption and the high complementarity of the qualities of intermediate goods in production. Thus, it helps explain the observed trade patterns. Moreover, the model shows that a smaller country is more likely to engage in international trade.