Imperfect Competition and the Gains from Trade in a Macro Duopoly Model

A general equilibrium duopoly trade model is developed. In the micro model constant elasticity market demand curves produce backward bending reaction functions. This is combined with a macro analysis in which the real wage is determined competitively, while nominal variables depend on the money supply. Trade can lead to large increases in aggregate output, employment and real wages. The gains from trade are the result of increases in market size, and greater competition in each market. The benefits of trade are largest when marginal cost curves slope downward and the labor supply curve is elastic