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Testing the ‘home market effect’ in a multi-country world

  • BEHRENS, Kristian
  • LAMORGESE, Andrea R.
  • OTTAVIANO, Gianmarco I.P.
  • TABUCHI, Takatoshi

We extend Krugman's (1980) two-country two-sector model to a setup with arbitrary numbers of countries and sectors. The extended model predicts an adequately defined "home market effect" only after controlling for cross-country differential accessibility through a theory-based linear filter. We bring that prediction to data by running a battery of non-parametric sign- and rank-tests that are closely related to those used in factor proportions theory. When applied to production and trade data on a cross-section of OECD and non-OECD countries, we find support for the presence of "home market effects" in a broad number of industries.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005055.

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Date of creation: 00 Sep 2005
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Handle: RePEc:cor:louvco:2005055
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  20. Amiti, Mary, 1998. "Inter-industry trade in manufactures: Does country size matter?," Journal of International Economics, Elsevier, vol. 44(2), pages 231-255, April.
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  22. Yong_Seok Choi & Pravin Krishna, 2000. "The Factor Content of Bilateral Trade:an Empirical Test," Working Papers 2000-11, Brown University, Department of Economics.
  23. Takatoshi Tabuchi & Kristian Behrens & Andrea R. Lamorgese, 2004. "Testing the Home Market Effects in a Multi-country World: The Theory," Econometric Society 2004 Far Eastern Meetings 595, Econometric Society.
  24. Werner Antweiler & Daniel Trefler, 2000. "Increasing Returns and All That: A View From Trade," NBER Working Papers 7941, National Bureau of Economic Research, Inc.
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  28. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
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