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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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Full references

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. Joeri Gorter & Albert Van der Horst, 2005. "New Economic Geography, Empirics, and Regional Policy," ERSA conference papers ersa05p236, European Regional Science Association. [Downloadable!]
    Other versions:
  3. BEHRENS, Kristian & LAMORGESE, Andrea R. & OTTAVIANO, Gianmarco I.P. & TABUCHI, Takatoshi, 2005. "Testing the Ôhome market effectÕ in a multi-country world," CORE Discussion Papers 2005055, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  4. Suedekum, Jens, 2005. "The Home Market Shadow," IZA Discussion Papers 1462, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Gordon H. Hanson & Chong Xiang, 2002. "The Home Market Effect and Bilateral Trade Patterns," Working Papers 481, Research Seminar in International Economics, University of Michigan. [Downloadable!]
    Other versions:
  6. Marius Brülhart & Federico Trionfetti, 2009. "A test of trade theories when expenditure is home biased," Working Papers halshs-00366530_v1, HAL. [Downloadable!]
    Other versions:
  7. Rolf Weder, 2003. "Comparative home-market advantage: An empirical analysis of British and American exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 139(2), pages 220-247, June. [Downloadable!] (restricted)
  8. 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:
  9. J. Suedekum, 2007. "Identifying the dynamic home market effect in a three-country model," Journal of Economics, Springer, vol. 92(3), pages 209-228, December. [Downloadable!] (restricted)
  10. Gianfranco De Simone, 2008. "Trade in Parts and Components and the Industrial Geography of Central and Eastern European Countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 144(3), pages 428-457, October. [Downloadable!] (restricted)
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