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American Economic Review Vol. 106 No. 10 2016

Trade, Domestic Frictions, and Scale Effects

Natalia Ramondo1; Andrés Rodríguez-Clare2; Milagro Saborío-Rodríguez3

1 School of Global Policy and Strategy, University of California, San Diego, 9500 Gilman Drive, La Jolla, CA 92093, and NBER (e-mail: ) · 2 Rodríguez-Clare: Department of Economics, University of California, Berkeley, 549 Evans Hall, Berkeley, CA 94720, and NBER (e-mail: ) · 3 Saborío-Rodríguez: Escuela de Economía, Universidad de Costa Rica, and CATIE, San Pedro de Montes de Oca, San Jose, Costa Rica (e-mail: )

open access

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.

DOI
10.1257/aer.20141449
Volume
106
Issue
10
Pages
3159-3184
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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