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Market Size and Factor Endowment: Explaining Comparative Advantage in Bilateral Trade by Differences in Income and Per Capita Income

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  • Dieter Schumacher

Abstract

Using a gravity-type explanation of international trade flows at the industry level, it is shown that the pattern of comparative advantage in terms of sectoral export/import ratios in bilateral trade can be explained by relative income and relative per capita income. Total income of a country is a proxy of its economic size and has a positive effect on comparative advantage in most manufacturing industries (home market effect). Per capita income represents the capital-labour endowment ratio and demand conditions. In sum, it has a positive effect in (human) capital-intensive industries and a negative effect in labour-intensive industries.

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  • Dieter Schumacher, 2001. "Market Size and Factor Endowment: Explaining Comparative Advantage in Bilateral Trade by Differences in Income and Per Capita Income," Discussion Papers of DIW Berlin 259, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp259
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    Cited by:

    1. Enrique Martínez-Galán & Maria-Paula Fontoura & Isabel Proença, 2005. "Trade Potential In An Enlarged European Union: A Recent Approach," International Trade 0508011, University Library of Munich, Germany.

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    More about this item

    Keywords

    Gravity model; comparative advantage; bilateral trade; home market effect; factor endowment;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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