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Title: A Test of Trade Theories when Expenditure is Home Biased

Author(s): Marius Brülhart and Federico Trionfetti

Publication Date: June 2005

Keyword(s): border effects, home-market effects, international specialization and new trade theory

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Brülhart, M and Trionfetti, F. 2005. 'A Test of Trade Theories when Expenditure is Home Biased'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5097