2016 Volume 22 Issue 1 Pages 1-15
We study a two-country two-factor model with free entry and monopolistic competition. There are two industries employing immobile labor as fixed input and mobile capital as marginal input. Firms cannot move across countries, but only move across industries within a country. The two industries can differ in three aspects: factor intensities, transport costs and demand elasticities. The two countries are identical except for size. The production specialization and trade pattern are the results of the interaction of two effects: the market access effect and the wage differential effect.