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Home-Biased Demand and International Specialisation: A Test of Trade Theories

Marius Brülhart and Federico Trionfetti

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: We develop and apply a discriminating criterion to distinguish the two principal paradigms of international trade theory: constant-returns perfectly competitive models on the one hand, and increasing-returns monopolistically competitive models on the other. Our criterion rests on the existence of home-biased demand. It predicts a positive relationship between countries' relative output and their relative home bias in increasing-returns sectors, and no relationship in constant-returns sectors. In implementing the test on data for OECD countries we find that industries accounting for up to two thirds of manufacturing output conform to the increasing-returns monopolistically competitive model.

Keywords: international specialisation; home-market effect; increasing returns (search for similar items in EconPapers)
JEL-codes: F1 R3 (search for similar items in EconPapers)
Pages: 33 pages
Date: 1999-10
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Working Paper: Home-Biased Demand and International Specialisation: A Test of Trade Theories (2000) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:9918

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