Paul Krugman summarizes Paul Krugman

The new trade theory starts with the observation that while this [the old trade theory] explains a lot of world trade, it also misses a lot. France and Germany sell lots of stuff to each other, even though they have similar climates and resources; so do the United States and Canada. What’s that about?

The answer is that there are many goods that aren’t like wheat or bananas, but are instead like wide-bodied jet aircraft. There are only a few places in which wide-bodied jets are produced, because of the enormous economies of scale – you only want a couple of factories worldwide. Those factories have to be somewhere, and those countries that get the factories export jets, while everyone else imports them.

But who gets the aircraft factories, or the factory producing a specialized kind of machine tool, or the plant producing a particular model of car that selected consumers all over the world want? The answer of new trade theory – and it was a tremendously liberating answer – is that it doesn’t matter. There are many economies-of-scale goods; everyone gets some of them; and the details, which may be largely a story of historical accident, aren’t important.

Here is the whole post, which covers his work on economic geography as well and relates it to his work on trade.  As you might expect, it is a very good exposition of...Paul Krugman.

If you are wondering, one early writer who saw a link between trade, location, urban economics, and increasing returns was the 17th century British pamphleteer Nicholas Barbon; his full name was Nicholas Unless-Jesus-Christ-Had-Died-For-Thee-Thou-Hadst-Been-Damned Barbon.  Barbon was also a precursor of aggregate demand theories of macroeconomics and an influence on Adam Smith.