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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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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. Rose, Andrew K, 2005. "Size Really Doesn't Matter: In Search of a National Scale Effect," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5350, C.E.P.R. Discussion Papers.
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  7. Francisco Alcalá & Antonio Ciccone, 2003. "Trade and Productivity," Working Papers 12, Barcelona Graduate School of Economics.
  8. Andres Rodriguez-Clare & Natalia Ramondo, 2007. "Trade, Multinational Production, and the Gains from Openness," 2007 Meeting Papers, Society for Economic Dynamics 819, Society for Economic Dynamics.
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Citations

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Cited by:
  1. 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.
  2. Markus Eberhardt & Zheng Wang & Zhihong Yu, 2013. "Intra-National Protectionism in China: Evidence from the Public Disclosure of ‘Illegal’ Drug Advertising," CSAE Working Paper Series 2013-07, Centre for the Study of African Economies, University of Oxford.
  3. 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.
  4. Ramondo, Natalia, 2014. "A quantitative approach to multinational production," Journal of International Economics, Elsevier, Elsevier, vol. 93(1), pages 108-122.

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