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Scale Effects and Productivity Across Countries: Does Country Size Matter?

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  • Natalia Ramondo
  • Andrés Rodríguez-Clare
  • Milagro Saborío-Rodríguez

Abstract

Models in which growth is driven by innovation naturally lead to scale effects. These scale effects result in the counterfactual prediction that larger countries should be much richer than smaller ones. We explore and quantify two candidates to solve the puzzle: First, countries are not fully isolated from each other; and second, countries are not fully integrated domestically. To such end, we build a quantitative model of trade and multinational production (MP) with frictions to move goods and ideas not only across, but also within countries. The calibrated model goes a long way to resolve the puzzle. The existence of domestic frictions, rather than openness to trade and MP, is what allows the extended model to come close to matching the data.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18532.

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Date of creation: Nov 2012
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Handle: RePEc:nbr:nberwo:18532

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  1. 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, vol. 91(4), pages 858-876, September.
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Cited by:
  1. Markus Eberhardt & Zheng Wang & Zhihong Yu, 2013. "Intra-National Protectionism in China: Evidence from the Public Disclosure of 'Illegal' Drug Advertising," Economics Series Working Papers WPS/2013-07, University of Oxford, Department of Economics.
  2. Ramondo, Natalia, 2014. "A quantitative approach to multinational production," Journal of International Economics, Elsevier, vol. 93(1), pages 108-122.
  3. Stephen J. Redding & Matthew A. Turner, 2014. "Transportation Costs and the Spatial Organization of Economic Activity," CEP Discussion Papers dp1277, Centre for Economic Performance, LSE.
  4. Markus Eberhardt & Zheng Wang & Zhihong Yu, 2014. "From One to Many Central Plans: Drug Advertising Inspections and Intra-National Protectionism in China," CESifo Working Paper Series 4682, CESifo Group Munich.

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