A spatial model of trade

We present a trade model with a continuum of regions, transportation costs and agglomeration effects via production externalities. The model is consistent with evidence from estimations of the Gravity Equation. We analyze the ef-fects of trade barriers and compare them to the effects of transportation costs. The results imply a sharp distinction between both, in terms of the specializa-tion patterns and trade ßows that they produce in equilibrium. The effect of trade barriers is ampliÞed by the production externalities thereby producing important border effects, as documented in the empirical literature. We also study the equilibrium specialization and trade patterns for different levels of transportation costs. Low transportation costs imply the classic core-periphery specialization pattern. In contrast, high transportation costs result in many areas producing each of the goods in the model