Trade, Domestic Frictions, and Scale Effects
American Economic Review
vol. 106,
no. 10, October 2016
(pp. 3159-84)
Abstract
Because of scale effects, idea-based growth models imply that larger countries should be much richer than smaller ones. New trade models share the same counterfactual feature. In fact, new trade models exhibit other counterfactual implications associated with scale effects: import shares decrease and relative income levels increase too steeply with country size. We argue that these implications are largely a result of the standard assumption that countries are fully integrated domestically. We depart from this assumption by treating countries as collections of regions that face positive costs to trade among themselves. The resulting model is largely consistent with the data.Citation
Ramondo, Natalia, Andrés Rodríguez-Clare, and Milagro Saborío-Rodríguez. 2016. "Trade, Domestic Frictions, and Scale Effects." American Economic Review, 106 (10): 3159-84. DOI: 10.1257/aer.20141449Additional Materials
JEL Classification
- F11 Neoclassical Models of Trade
- F14 Empirical Studies of Trade
- F43 Economic Growth of Open Economies
- O47 Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
- R12 Size and Spatial Distributions of Regional Economic Activity