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On the Home Market Effect: Theory and Empirical Evidence

Federico Trionfetti

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper addresses the question of how to discriminate between the H-O paradigm and the C-H-O paradigm of international trade. The test is based on the home-biased expenditure. The model predicts a positive relationshipp between a country's share of world's output (in any particular sector) and the country's share of world's home-biased expenditure if and only if the sector is characterize4d by IRS and monopolistic competition. The Empirical implementation showed an important but not overwhelming presence of the relationship. Specifically, 55% of the industrial activity could be attributed to the H-O paradigm while 45% could be attributed to the C-H-O paradigm.

Date: 1999-08
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