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A test of trade theories when expenditure is home biased

  • Marius Brülhart

    ()

    (HEC - LAUSANNE - École des HEC, Université de Lausanne Département d'économétrie et économie politique - Université de Lausanne)

  • Federico Trionfetti

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - CNRS - Centre National de la Recherche Scientifique)

We develop a criterion to distinguish two dominant paradigms of international trade theory: homogeneous-goods perfectly competitive models, and differentiated-goods monopolistically competitive models. Our analysis makes use of the pervasive presence of home-biased expenditure. It predicts that countries' relative output and their relative home biases are positively correlated in differentiated-goods sectors (the “home-bias effect”), while no such relationship exists in homogeneous-goods sectors. This discriminating criterion turns out to be robust to a number of generalisations of the baseline model. Our empirical results, based on a world-wide cross-country data set, suggest that the differentiated-goods model fits particularly well for the machinery, precision engineering and transport equipment industries, which account for some 40 percent of sample manufacturing output.

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Handle: RePEc:hal:wpaper:halshs-00366530
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