Trade, Domestic Frictions, and Scale Effects

Ramondo, Natalia; Rodr�guez-Clare, Andr�s; Sabor�o-Rodr�guez, Milagro

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, N., Rodríguez-Clare, A., & Saborío-Rodríguez, M. (2016). Trade, Domestic Frictions, and Scale Effects. American Economic Review, 106(10), 3159-3184. https://doi.org/10.1257/aer.20141449

• Journal Article Type: Article
• Acceptance Date: Jan 25, 2016
• Publication Date: 2016-10
• Deposit Date: May 27, 2020
• Publicly Available Date: May 28, 2020
• Journal: American Economic Review
• Print ISSN: 0002-8282
• Publisher: American Economic Association
• Peer Reviewed: Peer Reviewed
• Volume: 106
• Issue: 10
• Pages: 3159-3184
• DOI: https://doi.org/10.1257/aer.20141449
• Public URL: https://nottingham-repository.worktribe.com/output/3788895
• Publisher URL: https://www.aeaweb.org/articles?id=10.1257/aer.20141449