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American Economic Review: Vol. 100 No. 1 (March 2010)

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Can Multistage Production Explain the Home Bias in Trade?

Article Citation

Yi, Kei-Mu. 2010. "Can Multistage Production Explain the Home Bias in Trade?" American Economic Review, 100(1): 364-93.

DOI: 10.1257/aer.100.1.364

Abstract

A large empirical literature finds that there is too little international trade and too much intranational trade to be rationalized by observed international trade costs, such as tariffs and transport costs. This paper investigates whether a model in which the nature of production can change in response to trade costs -- a framework with multistage production -- can better explain the home bias in trade. The calibrated model can explain about two-fifths of the Canada border effect, about two-and-one-half times that of a model with one production stage. The model also explains a significant fraction of Canada-US "back-and- forth," or vertical specialization, trade. (JEL F11, F13, F14)

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Authors

Yi, Kei-Mu (Federal Reserve Bank of Philadelphia)

JEL Classifications

F11: Neoclassical Models of Trade
F13: Trade Policy; International Trade Organizations
F14: Country and Industry Studies of Trade


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