Theory of comparative advantage: Do transportation costs matter?

In this paper we present a formal analysis that incorporates returns to tra nsportation into a Ricardian framework to predict trade patterns. The impor tant point gained from this analysis is that increasing returns to transpor tation, coupled with appropriate distances between trading partners, can be shown to reverse Ricardian predictions even when there are no internationa l differences in tastes, technology, or factor endowments. Additional gains from trade may emerge from reductions in aggregate delivery costs owing to scale economies.