Why Do Countries Trade? Analytical and Empirical Inquiries

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9810180 Weinstein The most fundamental question in international economics is why countries trade. The principal theories have been elaborated in great detail, but empirics and the most basic questions are unanswered. This project makes important contributions to some of these questions: What are the relative contributions? Of scale economies, technical differences, and endowment differences in explaining actual trade patterns? Why does the theoretically robust Heckscher-Ohlin-Vanek theory suffer the dramatic failure that has been termed the "mystery of the missing trade"? Can the new theory of trade identified by the rubric "economic geography" help to account for the international pattern of production and trade? More specifically, the project addresses the relative contribution of scale economies, technical and endowment differences to understanding the causes of trade by exploring a rich panel of Japanese firm-level data to address the issue of the determinants of trade. The project investigates the contribution to our understanding of international specialization due to recent research in the area dubbed "economic geography," by extending theoretical work by Krugman and Venables which allows for the monopolistically competitive goods to serve not only as final outputs, but also as intermediate inputs in the production of all of the other varieties and by broadening the concept of market access. Finally, the project addresses the problem known as "the mystery of the missing trade", i.e., the surprising finding that measured net factor trade is an order smaller than that predicted by Heckscher-Ohlin-Vanek from national endowments. This project pursues cross-country technological differences using databases for OECD countries. Further insights will come from a comparison between import coefficients taken from Japan's national input matrix and direct measures from a panel of Japanese exporters. The project considers a variety ways of extending these insights to a broader samp le of countries. ??