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Market Size and Factor Endowment: Explaining Comparative Advantage in Bilateral Trade by Differences in Income and Per Capita Income

Dieter Schumacher

No 259, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Using a gravity-type explanation of international trade flows at the industry level, it is shown that the pattern of comparative advantage in terms of sectoral export/import ratios in bilateral trade can be explained by relative income and relative per capita income. Total income of a country is a proxy of its economic size and has a positive effect on comparative advantage in most manufacturing industries (home market effect). Per capita income represents the capital-labour endowment ratio and demand conditions. In sum, it has a positive effect in (human) capital-intensive industries and a negative effect in labour-intensive industries.

Keywords: Gravity model; comparative advantage; bilateral trade; home market effect; factor endowment (search for similar items in EconPapers)
JEL-codes: F12 (search for similar items in EconPapers)
Pages: 21 p.
Date: 2001
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