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On the home market effect: theory and empirical evidence

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This paper addresses the question of how to discriminate between the H-O paradigm and the C-H-O paradigm of international trade. The test is based on the home-biased expenditure. The model predicts a positive relationshipp between a country''s share of world''s output (in any particular sector) and the country''s share of world''s home-biased expenditure if and only if the sector is characterize4d by IRS and monopolistic competition. The Empirical implementation showed an important but not overwhelming presence of the relationship. Specifically, 55% of the industrial activity could be attributed to the H-O paradigm while 45% could be attributed to the C-H-O paradigm.

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en

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application/pdf

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http://eprints.lse.ac.uk/20215/1/On_the_Home_Market_Effect_Theory_and_Empirical_Evidence.pdf

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