Marius Brülhart and Frederico Trionfetti
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.
Published in March 2000.
This paper is available in PDF format .
Sir Clive Granger BuildingUniversity of NottinghamUniversity Park Nottingham, NG7 2RD
Enquiries: hilary.hughes@nottingham.ac.uk