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On the Home Market Effect: Theory and Empirical Evidence

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  • F Trionfetti

Abstract

This paper addresses the question of how to discriminate between the H-O paradigm and the C-H-O paradigm of international trade. The test is based on the home-biased expenditure. The model predicts a positive relationshipp between a country's share of world's output (in any particular sector) and the country's share of world's home-biased expenditure if and only if the sector is characterize4d by IRS and monopolistic competition. The Empirical implementation showed an important but not overwhelming presence of the relationship. Specifically, 55% of the industrial activity could be attributed to the H-O paradigm while 45% could be attributed to the C-H-O paradigm.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0430.

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Date of creation: Aug 1999
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Handle: RePEc:cep:cepdps:dp0430

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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References

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  1. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1029-46, December.
  2. Donald R. Davis & David E. Weinstein, 1997. "Economic Geography and Regional Production Structure: An Empirical Investigation," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1802, Harvard - Institute of Economic Research.
  3. John F. Helliwell, 1996. "Do National Borders Matter for Quebec's Trade?," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 29(3), pages 507-22, August.
  4. Davis, D.R. & Weinstein, D.E., 1997. "Does Economic Geography Matter for International Specialization?," Papers, Harvard - Institute for International Development 591, Harvard - Institute for International Development.
  5. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers, Michigan - Center for Research on Economic & Social Theory 95-05, Michigan - Center for Research on Economic & Social Theory.
  6. Brülhart, Marius & Trionfetti, Federico, 1998. "Industrial Specialisation and Public Procurement: Theory and Empirical Evidence," Economics Technical Papers, Trinity College Dublin, Department of Economics 983, Trinity College Dublin, Department of Economics.
  7. Donald R. Davis & David E. Weinstein, 1998. "An Account of Global Factor Trade," NBER Working Papers 6785, National Bureau of Economic Research, Inc.
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  9. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, American Economic Association, vol. 76(5), pages 1002-11, December.
  10. Donald R. Davis & David E. Weinstein, 1998. "Market Access, Economic Geography and Comparative Advantage: An Empirical Assessment," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1850, Harvard - Institute of Economic Research.
  11. David Hummels & James Levinsohn, 1993. "Monopolistic Competition and International Trade: Reconsidering the Evidence," NBER Working Papers 4389, National Bureau of Economic Research, Inc.
  12. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 615-23, June.
  13. McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, Elsevier, vol. 26(3-4), pages 291-308, May.
  14. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  15. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
  16. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier.
  17. Robert C. Feenstra & James A. Markusen & Andrew K. Rose, 1998. "Undertstanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods," NBER Working Papers 6804, National Bureau of Economic Research, Inc.
  18. Davis, Donald R, 1997. "Critical Evidence on Comparative Advantage? North-North Trade in a Multilateral World," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(5), pages 1051-60, October.
  19. Keith E. Maskus, 1991. "Comparing International Trade Data and Product and National Characteristics Data for the Analysis of Trade Models," NBER Chapters, in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 17-60 National Bureau of Economic Research, Inc.
  20. Branco, Fernando, 1994. "Favoring domestic firms in procurement contracts," Journal of International Economics, Elsevier, Elsevier, vol. 37(1-2), pages 65-80, August.
  21. Erik Lundbäck & Johan Torstensson, 1998. "Demand, comparative advantage and economic geography in international trade: Evidence from the OECD," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 134(2), pages 230-249, June.
  22. Deardoff, A.V., 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," Working Papers, Research Seminar in International Economics, University of Michigan 382, Research Seminar in International Economics, University of Michigan.
  23. Harrigan, James, 1994. "Scale Economies and the Volume of Trade," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 321-28, May.
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  25. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
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Citations

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Cited by:
  1. Zhihao Yu, 2000. "Market Integration and Industrial Structure: Home Market Effects Revisited," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0033, Econometric Society.
  2. Marius BRÜLHART & Federico TRIONFETTI, 1999. "Home-Biased Demand and International Specialisation : A Test of Trade Theories," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9918, Université de Lausanne, Faculté des HEC, DEEP.
  3. Gordon H. Hanson & Chong Xiang, 2002. "The Home Market Effect and Bilateral Trade Patterns," Working Papers, Research Seminar in International Economics, University of Michigan 481, Research Seminar in International Economics, University of Michigan.
  4. Takatoshi Tabuchi & Kristian Behrens & Andrea R. Lamorgese, 2004. "Testing the Home Market Effects in a Multi-country World: The Theory," Econometric Society 2004 Far Eastern Meetings, Econometric Society 595, Econometric Society.
  5. Leo Sleuwaegen & Koen Backer, 2001. "Multinational firms, market integration, and trade structure: What remains of the standard-goods hypothesis?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 137(3), pages 379-403, September.
  6. Kant, Chander, 2005. "Capital mobility among advanced countries," Journal of Policy Modeling, Elsevier, Elsevier, vol. 27(9), pages 1067-1081, December.
  7. Keith Head & John Ries, 2001. "Increasing Returns versus National Product Differentiation as an Explanation for the Pattern of U.S.-Canada Trade," American Economic Review, American Economic Association, American Economic Association, vol. 91(4), pages 858-876, September.

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