The integrated equilibrium has been widely used as an analytical tool in international trade theory since its popularisation by Dixit and Norman (1980), although the idea can be traced back to at least Samuelson (1949). It starts from an integrated world economy with free movement of goods and factors of production, then divides the world economy into countries, restricting the movement of factors of production, and asking whether free trade in goods alone can replicate the resource allocation and goods and factor prices that characterise the integrated equilibrium. Importantly, in a competitive model with perfect markets, the integrated equilibrium set of prices and quantities represents the most efficient allocation of resources in the world economy, in the sense that total world income is maximised. Whilst the original formulation of the integrated equilibrium was based on a perfectly competitive, comparative advantage framework, Helpman and Krugman (1985) show that it can also be used in models of international trade based on increasing returns and product differentiation, which has been used in explaining patterns of intra industry trade (that is, trade in similar goods).

However, increasing returns to scale and product differentiation are not the only ways of modelling intra%industry trade. In an important paper, Davis (1995) showed that intra%industry trade can be the outcome of a model based on constant returns to scale and comparative advantage. The basic idea of the Davis Heckscher Ohlin Ricardo (HOR) model is that, when there are three goods, two of which are intra industry in the sense of sharing identical production techniques, and one of the trading partners has an absolute (technological) advantage in producing one of these intra industry goods, then if this country has sufficient factor endowments, it will produce the entire worlds output of that good. However, the remaining resources may result in the other country producing most of the worlds output of the other intra industry good. There will then be two%way trade in this intra industry good.