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A Test of Trade Theories when Expenditure is Home Biased

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  • Marius BRÜLHART
  • Federico TRIONFETTI

Abstract

We develop and apply a criterion to distinguish two paradigms of international trade theory: constant-returns perfectly competitive models, and increasing-returns 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 increasing-returns sectors, while no such relationship exists in constant-returns sectors. We estimate country-level sectoral home biases through a gravity equation for international and intranational trade, and we use those estimates to implement our test on input-output data for six European Union economies.

Suggested Citation

  • Marius BRÜLHART & Federico TRIONFETTI, 2001. "A Test of Trade Theories when Expenditure is Home Biased," Cahiers de Recherches Economiques du Département d'économie 01.11, Université de Lausanne, Faculté des HEC, Département d’économie.
  • Handle: RePEc:lau:crdeep:01.11
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    More about this item

    Keywords

    international specialisation; new trade theory; home-market effects; border effects;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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