Missing trade and lumpy countries
AbstractEmpirically, Trefler (1995) shows that actual trade flows deviate from predictions based on factor abundance theory in a systematic way (which he calls the â€šÃ„Ã²case of the missing tradeâ€šÃ„Ã´). Theoretically, Courant and Deardorff (1992) show that an uneven distribution of factors of production across regions within a country (which they call â€šÃ„Ã²lumpinessâ€šÃ„Ã´) affect aggregate trade flows at the country level. In particular, a country tends to export the good that intensively uses its more unevenly distributed factor of production. Based on the urban economics literature, we use a simple measure of the degree of lumpiness to show that Treflerâ€šÃ„Ã´s missing trade flows are systematically related to our measure of the degree of lumpiness. This implies that not only home bias and technology differences may explain the missing trade flows, but also the uneven distribution of factors of production.
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