Theory of Comparative Advantage: Do Transportation Costs Matter?

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