Working Paper: NBER ID: w5706
Authors: Donald R. Davis; David E. Weinstein
Abstract: There are two principal theories of why countries trade: comparative advantage and increasing returns to scale. Yet there is no empirical work that assesses the relative importance of these two theories in accounting for production structure and trade. We use a framework that nests an increasing returns model of economic geography featuring home market effects with that of Heckscher-Ohlin-Vanek. We employ these trade models to account for the structure of OECD manufacturing production. The data militate against the economic geography framework. Moreover, even in the specification most generous to economic geography, endowments account for 90 percent of the explainable variance, economic geography but 10 percent.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| differences in factor endowments (F16) | production structure (L23) |
| increasing returns (I26) | production structure (L23) |
| strong demand (R22) | imports (F14) |
| strong demand (R22) | exports (F10) |