We have presented a simple model to show that trade elasticity is determined by not only consumers’ preferences, but also producers’ comparative advantages in a world where trade is driven by both consumers’ love-of-variety and producers’ comparative advantages. In this model, scale matters in trade elasticity, with smaller countries tending to exhibit a larger one. In addition to tradable intermediate goods, this model also shows that scale is a key factor influencing gains from trade. As a result, smaller countries that are engaged in more international outsourcing activities typically benefit with relatively greater gains from trade after trade liberalization.

gains from trade, trade elasticity, international outsourcing, welfare