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A Test of Trade Theories when Expenditure is Home Biased

Marius Brülhart and Federico Trionfetti

No 5097, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a criterion to distinguish two dominant 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 (the ‘home-bias effect’), while no such relationship exists in constant-returns sectors. This discriminating criterion turns out to be robust to a number of generalizations of the baseline model. Our empirical results suggest that the increasing-returns model fits particularly well for the mechanical and electrical engineering industries, which account for close to half of manufacturing output.

Keywords: border effects; home-market effects; international specialization; new trade theory (search for similar items in EconPapers)
JEL-codes: F10 R30 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-int
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Journal Article: A test of trade theories when expenditure is home biased (2009) Downloads
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 (2001) Downloads
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