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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.

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Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 01.11.

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Length: 39 pages
Date of creation: Nov 2001
Date of revision:
Handle: RePEc:lau:crdeep:01.11
Contact details of provider: Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
Web page: http://www.hec.unil.ch/deep/publications/cahiers/seriesEmail:


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Keywords: international specialisation; new trade theory; home-market effects; border effects;

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Find related papers by 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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