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A test of trade theories when expenditure is home biased

Marius Brülhart and Federico Trionfetti

European Economic Review, 2009, vol. 53, issue 7, 830-845

Abstract: 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% of sample manufacturing output.

Keywords: International; specialisation; New; trade; theory; Home-market; effects; Border; effects (search for similar items in EconPapers)
Date: 2009
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Related works:
Working Paper: A test of trade theories when expenditure is home biased (2009) Downloads
Working Paper: A Test of Trade Theories when Expenditure is Home Biased (2005) Downloads
Working Paper: A Test of Trade Theories when Expenditure is Home Biased (2001) Downloads
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