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Market Size and Factor Endowment: Explaining Comparative Advantage in Bilateral Trade by Differences in Income and Per Capita Income

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  • Dieter Schumacher

Abstract

Using a gravity-type explanation of international trade flows at the industry level, it is shown that the pattern of comparative advantage in terms of sectoral export/import ratios in bilateral trade can be explained by relative income and relative per capita income. Total income of a country is a proxy of its economic size and has a positive effect on comparative advantage in most manufacturing industries (home market effect). Per capita income represents the capital-labour endowment ratio and demand conditions. In sum, it has a positive effect in (human) capital-intensive industries and a negative effect in labour-intensive industries.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.38534.de/dp259.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 259.

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Length: 21 p.
Date of creation: 2001
Date of revision:
Handle: RePEc:diw:diwwpp:dp259

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Related research

Keywords: Gravity model; comparative advantage; bilateral trade; home market effect; factor endowment;

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References

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  1. Davis, Donald R, 1998. "The Home Market, Trade, and Industrial Structure," American Economic Review, American Economic Association, vol. 88(5), pages 1264-76, December.
  2. Adrian Wood, 1994. "Give Heckscher and Ohlin a chance!," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(1), pages 20-49, March.
  3. Michael Freudenberg & Harald Trabold, 1999. "Vertikale Produktdifferenzierung im Außenhandel: Theoretische Grundlagen und empirischer Befund," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 68(3), pages 356-385.
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  6. Feenstra, Robert & Markusen, James R. & Rose, Andrew K, 1998. "Understanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods," CEPR Discussion Papers 2035, C.E.P.R. Discussion Papers.
  7. repec:att:wimass:9713 is not listed on IDEAS
  8. Dieter Schumacher, 1992. "A note on the human capital intensity of EC trade," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 133, pages 3-19.
  9. Baier, Scott L. & Bergstrand, Jeffrey H., 2001. "The growth of world trade: tariffs, transport costs, and income similarity," Journal of International Economics, Elsevier, vol. 53(1), pages 1-27, February.
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  18. Simon J. Evenett & Wolfgang Keller, 1998. "On Theories Explaining the Success of the Gravity Equation," NBER Working Papers 6529, National Bureau of Economic Research, Inc.
  19. Dhar, Sumana & Panagariya, Arvind, 1994. "Is East Asia less open than North America and the European Economic Community? No," Policy Research Working Paper Series 1370, The World Bank.
  20. Piazolo, Daniel, 1997. "Trade Integration between Eastern and Western Europe: Policies Follow the Market," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 12, pages 259-297.
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  22. Deardorff, Alan V, 1982. "The General Validity of the Heckscher-Ohlin Theorem," American Economic Review, American Economic Association, vol. 72(4), pages 683-94, September.
  23. Dieter Schumacher, 1995. "Impact on German Trade of Increased Division of Labour with Eastern Europe," Discussion Papers of DIW Berlin 116, DIW Berlin, German Institute for Economic Research.
  24. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December.
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Cited by:
  1. Enrique Martínez-Galán & Maria-Paula Fontoura & Isabel Proença, 2005. "Trade Potential In An Enlarged European Union: A Recent Approach," International Trade 0508011, EconWPA.

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