International Trade with a Public Intermediate Good and the Gains from Trade

We develop a one-primary factor, two-consumer good and two-country model of international trade where a country-specific public intermediate good is supplied efficiently through the Lindahl pricing rule in each country. Then it is shown that the country with larger factor endowment exports the good whose productivity is more sensitive to the public intermediate good. As for the gains from trade, we show that an incompletely specializing country necessarily loses from trade. We also presents the necessary and sufficient condition for a completely specializing country to gain from trade