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Increasing Returns and Economics Prosperity: How Can Size not Matter?

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  • Natalia Ramondo

    (Arizona State University)

Abstract

Models that feature ideas naturally lead to scale effects, and this results in the counterfactual implication that larger countries should be richer than smaller ones. Perhaps small countries are not poor because they beneï¬Ât from foreign ideas through trade. Quantitative trade models do imply that small countries gain more from trade than large countries, but the difference is too small to make a difference. There are two candidates to solve the puzzle: ï¬Ârst, there are additional ways besides trade through which countries are integrated to the rest of the world, and second, countries are not fully integrated domestically. In this paper we explore these two ideas by building a quantitative model of trade and multinational production with frictions to the domestic movement of goods and ideas. The resulting model comes close to solving the puzzle, but not fully.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 143.

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Date of creation: 2012
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Handle: RePEc:red:sed012:143

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  1. Natalia Ramondo & Andr�s Rodr�guez-Clare, 2013. "Trade, Multinational Production, and the Gains from Openness," Journal of Political Economy, University of Chicago Press, vol. 121(2), pages 273 - 322.
  2. Michael E. Waugh, 2010. "International Trade and Income Differences," American Economic Review, American Economic Association, vol. 100(5), pages 2093-2124, December.
  3. Natalia Ramondo & Andrés Rodríguez-Clare, 2010. "Growth, Size, and Openness: A Quantitative Approach," American Economic Review, American Economic Association, vol. 100(2), pages 62-67, May.
  4. Francisco Alcalá & Antonio Ciccone, 2001. "Trade and productivity," Economics Working Papers 580, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2002.
  5. Arnaud Costinot & Dave Donaldson & Ivana Komunjer, 2012. "What Goods Do Countries Trade? A Quantitative Exploration of Ricardo's Ideas," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 581-608.
  6. Lorenzo Caliendo & Fernando Parro, 2012. "Estimates of the Trade and Welfare Effects of NAFTA," NBER Working Papers 18508, National Bureau of Economic Research, Inc.
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