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Home-Biased Demand and International Specialisation: A Test of Trade Theories
Université de Lausanne - HEC - DEEP
Cahiers de recherches économiques
Number of pages
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.
International specialisation, home-market effect, increasing returns
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