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Increasing Returns and Economics Prosperity: How Can Size not Matter?

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  • Natalia Ramondo

    (Arizona State University)

Abstract

Models that feature ideas naturally lead to scale effects, and this results in the counterfactual implication that larger countries should be richer than smaller ones. Perhaps small countries are not poor because they beneï¬Ât from foreign ideas through trade. Quantitative trade models do imply that small countries gain more from trade than large countries, but the difference is too small to make a difference. There are two candidates to solve the puzzle: ï¬Ârst, there are additional ways besides trade through which countries are integrated to the rest of the world, and second, countries are not fully integrated domestically. In this paper we explore these two ideas by building a quantitative model of trade and multinational production with frictions to the domestic movement of goods and ideas. The resulting model comes close to solving the puzzle, but not fully.

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  • Natalia Ramondo, 2012. "Increasing Returns and Economics Prosperity: How Can Size not Matter?," 2012 Meeting Papers 143, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:143
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    References listed on IDEAS

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    1. Francisco Alcalá & Antonio Ciccone, 2004. "Trade and Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 119(2), pages 613-646.
    2. Alvarez, Fernando & Lucas, Robert Jr., 2007. "General equilibrium analysis of the Eaton-Kortum model of international trade," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1726-1768, September.
    3. Lorenzo Caliendo & Fernando Parro, 2015. "Estimates of the Trade and Welfare Effects of NAFTA," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 1-44.
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