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A Test of Trade Theories when Expenditure is Home Biased

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  • Brülhart, Marius
  • Trionfetti, Federico

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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