PRODUCER SERVICES, COMPARATIVE ADVANTAGE, AND INTERNATIONAL-TRADE PATTERNS

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