Increasing Returns Versus National Product Differentiation as an Explanation for the Pattern of U.S.–Canada Trade
Abstract
We evaluate two alternative models of international trade in differentiated products. An increasing returns model where varieties are linked to firms predicts home market effects: increases in a country's share of demand cause disproportionate increases in its share of output. In contrast, a constant returns model with national product differentiation predicts a less than proportionate increase. We examine a panel of U.S. and Canadian manufacturing industries to test the models. Although we find support for either model, depending on whether we estimate based on within or between variation, the preponderance of the evidence supports national product differentiation. (JEL F12, F15)
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The home-market effect-a positive effect of demand on exports-implies the existence of economies of scale at the sector level.
“Indeed, the home-market effect-that is, a positive effect of demand on exports-implies the existence of economies of scale at the sector level.”
From The Textbook Case for Industrial Policy: Theory Meets Data (2019) · cites this paper as Head and Ries (2001)
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The Textbook Case for Industrial Policy: Theory Meets Data
Bartelme, D., Costinot, A., Donaldson, D., & Rodríguez-Clare, A. (2019) · NBER Working Paper · doi:10.3386/w26193 · Cited by 114 · see citing works
- Authors
- Head, K., & Ries, J.
- Affiliations
- University of British Columbia (CA)
- Venue
- American Economic Review
- Publisher
- American Economic Association
- Published
- 2001-09-01
- Volume
- 91
- Issue
- 4
- Pages
- 858-876
- ISSN
- 0002-8282 (ISSN-L)
- OpenAlex
- W2004103375
- Cited by
- 761
- References
- 0
- Citations by year
- 2026: 24 · 2025: 28 · 2024: 26 · 2023: 26 · 2022: 35 · 2021: 38 · 2020: 34 · 2019: 23 · 2018: 38 · 2017: 33 · 2016: 36 · 2015: 34 · 2014: 33 · 2013: 38 · 2012: 35
- FWCI
- 49.65
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- American Economic Review (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Global trade and economics
- Social Sciences › Business, Management and Accounting › Strategy and Management › Global Trade and Competitiveness
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic and Technological Innovation
- Keywords
- increasing returns, differentiated products, home market effect, US-Canada trade relations, manufacturing industry, trade patterns, international trade models
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