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A Test of Trade Theories when Expenditure is Home Biased

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Author Info
Brülhart, Marius
Trionfetti, Federico

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Abstract

We develop a criterion to distinguish two dominant paradigms of international trade theory: constant-returns perfectly competitive models, and increasing-returns monopolistically competitive models. Our analysis makes use of the pervasive presence of home-biased expenditure. It predicts that countries’ relative output and their relative home biases are positively correlated in increasing-returns sectors (the ‘home-bias effect’), while no such relationship exists in constant-returns sectors. This discriminating criterion turns out to be robust to a number of generalizations of the baseline model. Our empirical results suggest that the increasing-returns model fits particularly well for the mechanical and electrical engineering industries, which account for close to half of manufacturing output.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5097.

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Date of creation: Jun 2005
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Handle: RePEc:cpr:ceprdp:5097

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Keywords: border effects home-market effects international specialization new trade theory

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Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
R30 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - General

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Toshihiro Okubo & Vincent Rebeyrol, 2006. "Home Market Effect and Regulation Costs - Homogeneous Firm and Heterogeneous Firm Trade Models," HEI Working Papers 02-2006, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
  2. Gordon H. Hanson & Chong Xiang, 2002. "The Home Market Effect and Bilateral Trade Patterns," NBER Working Papers 9076, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Head, Charles Keith & Mayer, Thierry, 2003. "The Empirics of Agglomeration and Trade," CEPR Discussion Papers 3985, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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