derives from similar tasks being performed for other Boeing projects or for related industries, such as military aviation and automobile production.<sup>4</sup> In this paper, we formulate a theory of task trade between countries that have similar exogenous sources of comparative advantage but di¤er in size. In our model, the supply of any good requires a ...xed input of managerial e¤ort plus the completion of a continuum of production tasks. The set of required tasks is the same for all goods, yet the resulting products are di¤erentiated in the eyes of consumers. Producers of the ...nal goods engage in monopolistic competition and sell their wares to consumers who hold constant-elasticity-of-substitution (CES) preferences. We explore the links between country size and the pattern of specialization and task trade.

The Boeing Dreamliner example can help us to contrast our notion of a “task”with the commonly used concept of an intermediate good. In our formulation, a task is the ...nest possible addition to the value added of a good or service done by a particular factor of production. Of course, actual international trade transactions in general involve bundles of tasks that ...t the description of an intermediate good. Thus, a theory of task trade can be understood as a theory in which the characteristics of the bundles of tasks forming intermediate goods are determined endogenously depending on the cost of o¤shoring each task. The ‘wings’of the Dreamliner may be produced in Japan, but the particular composition of the wing–whether it includes assembly, testing, and painting, for example— is not technologically pre-determined, but rather is part of the deliberate production design by Boeing.

In keeping with the anecdotal evidence cited above, our treatment of production sharing emphasizes the role of local knowledge and specialized expertise. Our approach shares with the “new trade theory” a focus on increasing returns to scale as a force that induces concentration of production. But whereas the most familiar models in that literature feature trade in ...nal goods— for which scale economies internal to the ...rm may be most pertinent— our focus on task trade dictates a di¤erent approach. The expertise to produce a unique good may well reside in a single ...rm, but the expertise to perform a narrow task rarely does so. Rather, it is often embodied in a pool of specialized labor, be they engineers with speci...c training or workers with shared experience. This suggests that, in the absence of complete contracts, localized knowledge at the task level may re‡ect external economies of scale rather than (or in addition to) internal economies. We take this notion to the extreme by assuming that productivity in performing a task varies with the frequency with which it is performed in a particular location, irrespective of the identify of the ...rm or ...rms performing the function.

The location of each task balances two competing forces. On the one hand, the external economies of scale provide ...rms with an incentive to locate each task in the country where others are performing it. On the other hand, it is costly for ...rms to organize and monitor the performance of tasks in countries di¤erent from where their headquarters are located. Our model features heterogeneous o¤shoring costs to capture the reality that some tasks are easier to separate from ...rms’ headquarters than others. For example, routine tasks can be performed remotely at relatively little

> 4 See “A Cleverer Way to Build a Boeing,” The Financial Times, 07/08/2007.

2