Market Size and Factor Endowment: Explaining Comparative Advantage in Bilateral Trade by Differences in Income and Per Capita Income

DIW Discussion Paper No. 259

41 Pages Posted: 6 Mar 2002

See all articles by Dieter Schumacher

Dieter Schumacher

German Institute for Economic Research (DIW Berlin) - Department of International Economics

Date Written: August 2001

Abstract

Using a gravity-type explanation of international trade flows at the industry level, it is shown that the pattern of comparative advantage in terms of sectoral export/import ratios in bilateral trade can be explained by relative income and relative per capita income. Total income of a country is a proxy of its economic size and has a positive effect on comparative advantage in most manufacturing industries (home market effect). Per capita income represents the capital-labour endowment ratio and demand conditions. In sum, it has a positive effect in (human) capital-intensive industries and a negative effect in labour-intensive industries.

Keywords: Gravity model, comparative advantage, bilateral trade, home market effect, factor endowment

JEL Classification: F12

Suggested Citation

Schumacher, Dieter, Market Size and Factor Endowment: Explaining Comparative Advantage in Bilateral Trade by Differences in Income and Per Capita Income (August 2001). DIW Discussion Paper No. 259, Available at SSRN: https://ssrn.com/abstract=302339 or http://dx.doi.org/10.2139/ssrn.302339

Dieter Schumacher (Contact Author)

German Institute for Economic Research (DIW Berlin) - Department of International Economics ( email )

Mohrenstra├če 58
Berlin, 10117
Germany
+49-30-89789-670 (Phone)
+49-30-89789-305 (Fax)

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