As we saw in Chapter 3, already in 1776 Adam Smith pointed out the importance of increasing returns to scale for international trade in his Wealth of Nations. It is rather recent, however, that the role of increasing returns has begun to be discussed seriously in the modern theory of international trade. Since the assumption of perfect competition, which has been widely made, is not consistent with the so-called internal economies, Marshallian external economies have been considered by e.g., Mathews , Melvin  and Kemp and Negishi .1 While these early Marshallian approaches forcus on on the relation of commodity prices and commodity trade, Ethier  suggests a drastically different one which forcuses on prices of factors of production (see Krugman ).
KeywordsInternational Trade Foreign Exchange Demand Curve Foreign Exchange Market Domestic Currency
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- Krugman, P. R., 1987, Increasing returns and the theory of international trade, in T. F. Bewley, ed., Advances in Economic Theory, Cambridge University Press.Google Scholar
- Marshall, A., 1961, Principles of Economics,Macmillan.Google Scholar
- Negishi, T., 1979, Foreign exchange gains in a Keynesian model of international trade, Economie appliquee, 32, 623 – 633.Google Scholar