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In the course of researching my job market paper, I read a lot of old or obscure literature related to the Linder hypothesis. It yielded some real gems. Unfortunately, I also unearthed some big disappointments. You’ll see what I mean in a moment.
For the moment, here’s the abstract of McPherson, Redfearn and Tieslau – “International trade and developing countries: an empirical investigation of the Linder hypothesis” in Applied Economics (2001), an article with 44 citations in Google Scholar:
This paper presents empirical evidence in support of the Linder hypothesis for five of the six East African developing countries studied here: Ethiopia, Kenya, Rwanda, Sudan and Uganda. This finding implies that these countries trade more intensively with others who have similar per capita income levels, as predicted by Linder. The contributions of this research are three-fold. First, new information is provided on the Linder hypothesis by focusing on developing countries. Second, this is one of very few analyses to capture both time-series and cross-section elements of the trade relationship by employing a panel data set. Third, the empirical methodology used in the analysis corrects a major shortcoming in the existing literature by using a censored dependent variable in estimation.
Now, here’s the abstract of Bukhari, Ahmad, Alam, Bukhari, and Butt – “An Empirical Analysis of the Linder Theory of International Trade for South Asian Countries” in The Pakistan Development Review (2005), with zero citations in Google Scholar:
This paper presents empirical evidence in support of the Linder theory of international trade for three of the South Asian countries, Bangladesh, India, and Pakistan. This finding implies that these countries trade more intensively with countries of other regions, which may have similar per capita income levels, as predicted by Linder in his hypothesis. The contribution of this research is threefold: first, there is new information on the Linder hypothesis by focusing on South Asian countries; second, this is one of very few analyses to capture both time-series and cross-section elements of the trade relationship by employing a panel data set; third, the empirical methodology used in this analysis corrects a major shortcoming in the existing literature by using a censored dependent variable in estimation.
It continues like this, paragraph for paragraph. Finally, we arrive at Table 2 of each paper. Here’s McPherson, Redfearn and Tieslau:
And here’s Bukhari, Ahmad, Alam, Bukhari, and Butt:
That’s Bangladesh-Kenya, India-Ethiopia, and Pakistan-Uganda with identical rows. The same thing occurs in Table 3. It continues, all the way through the concluding paragraphs.
It’s that time of year again. Who’s on the job market this year with a paper on international trade?
As resident blogger, I’m going to exercise a point of personal privilege to note that I am on the job market this year. Please tell your friends who are on hiring committees.
Jonathan Dingel (Columbia): “The Determinants of Quality Specialization”
With that important piece of information out of the way, here are this year’s trade candidates:
- Vanessa Alviarez (Michigan): “Multinational Production and Comparative Advantage”
- Andrea Ariu (Université catholique de Louvain): “Crisis-Proof Services: Why Trade in Services Did not Suffer During the 2008-2009 Crisis”
- Dany Bahar (HKS): “Heavier than Air? Knowledge Transmission within the Multinational Firm”
- Xue Bai (Penn State): “How You Export Matters: Export Mode, Learning, and Productivity in China”
- Silja Baller (Oxford): “Product Quality, Market Size and Welfare: Theory and Evidence from French Exporters”
- Felipe Benguria (UVA): “Production and Distribution in International Trade: Evidence from Matched Exporter-Importer Data”
- Johannes Boehm (LSE): “The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity”
- Doug Campbell (UC Davis): “Relative Prices, Hysteresis, and the Decline of American Manufacturing”
- Cheng Chen (Princeton): “Management Technology and the Hierarchical Firm in the Global Economy”
- Eliav Danziger (Princeton): “Skill Acquisition and the Dynamics of Trade Induced Inequality”
- David DeRemer (Université libre de Bruxelles): “Domestic Policy Coordination in Imperfectly Competitive Markets”
- Jonathan Dingel (Columbia): “The Determinants of Quality Specialization”
- Raluca Dragusanu (HBS): “Firm-to-Firm Matching Along the Global Supply Chain”
- Daisuke Fujii (Chicago): “International Trade Dynamics with Sunk Costs and Productivity Shocks”
- Cecile Gaubert (Princeton): “Firm Sorting and Agglomeration”
- Hang-Wei Hao (UC Davis): “The China Puzzle: Theory and Evidence on the Behavior of Chinese Exports during the 2008-2009 Global Financial Crisis”
- Leo Karasik (Toronto): “New Exporters during the Great Recession: Is the Large Fixed Cost Story Marginal?”
- Adriaan Ten Kate (Chicago): “Industry composition, trade barriers and their welfare implications: Evidence from Peru’s trade liberalization”
- Minho Kim (WUSTL): “Multi-Stage Production and International Trade”
- Ahmad Lashkaripour (Penn State): “Breaking Down Elasticities: Rebuilding Gravity and the Gains from Trade”
- Chi-Hung Liao (UC Davis): “Pricing-to-Market in Quality Dimension and Income Inequality”
- Philip A. Luck (UC Davis): “Intermediate Good Sourcing, Wages and Inequality: From Theory to Evidence”
- Michael Maio (Minnesota): “Foreign Competition and Firm Productivity: A Principal-Agent Approach”
- Ryan Monarch (Michigan): “It’s Not You, It’s Me: Breakups in U.S.-China Trade Relationships”
- Joan Monras (Columbia): “Immigration and Wage Dynamics: Evidence from the Mexican Peso Crisis”
- Gabriel Smagghue (Sciences Po): “A new Method for Quality Estimation using Trade Data: An Application to French firms”
- Sebastian Sotelo (Chicago): “Trade Frictions and Agricultural Productivity: Theory and Evidence from Peru”
- Grigorios Spanos (Toronto): “Sorting in French Production Hierarchies”
- Walter Steingress (Montreal): “Entry barriers to international trade: product versus firm fixed costs”
- Claudia Steinwender (LSE): “Information Frictions and the Law of One Price: When the States and the Kingdom became United”
- Sebastian Stumpner (Berkeley): “Trade and the Geographic Spread of the Great Recession”
- Phyllis Kit Yee Sun (Princeton): “A Theory of Worker-Level Comparative Advantage and Task Specialization within Jobs”
- Pierre-Louis Vezina (Oxford): “Migrant Networks and Trade: The Vietnamese Boat People as a Natural Experiment”
- Andrea Waddle (Minnesota): “Trade, Technology and the Skill Premium: The Case of Mexico”
Paul Krugman’s 1980 AER paper formally introduced the home-market effect. In introducing his result, he mentions (p.955):
Notice that this argument is wholly dependent on increasing returns; in a world of diminishing returns strong domestic demand for a good will tend to make it an import rather than an export. But the point does not come through clearly in models where increasing returns take the form of external economies (see W. M. Corden). One of the main contributions of the approach developed in this paper is that by using this approach the home market can be given a simple formal justification.
I doubt that very many people have looked at the Corden reference, as it appeared in a 1970 conference volume titled Studies in international economics. Monash Conference papers. Here’s an excerpt from the surprisingly prescient three-page note:
A note on economies of scale, the size of the domestic market and the pattern of trade
Professor Grubel suggests that a country will tend to produce and export those products or ‘styles’ of products for which it has a relatively large domestic market. He explains this in terms of economies of scale. This is essentially the ‘Linder hypothesis’ which has obtained some empirical support, as well as being intuitively plausible. But it does raise an interesting theoretical question which has not, to my knowledge, been explored, in a simple static two-product two-country model with no transport costs, with economies of scale and with the demand patterns differing between the two countries it does not follow that a country will export that product to which its own demand pattern is biased. In that sort of model, as is well-known, one can say only that at least one of the two countries, and possibly both, will specialise, but one cannot say which country will specialise in which good. From the point of view of maximising potential world income there will be an optimum pattern of specialisation, but this will not depend in any simple predictable way on differences between the demand patterns of the two countries. Thus we cannot obtain the Linder hypothesis from this simple model. The question then is: What else must we put into the model? Is it transport costs, or is it rather something ‘dynamic’ ? In order to focus on the main point I shall now assume that the two countries are of equal size, that their factor endowments and production functions are identical, and that any differences between the factor-intensities of the two products are not large. Hence the two countries have identical convex production transformation curves. They differ only in their demand patterns. Country A’s demand pattern is biased towards product X and country B’s towards product Y. Needless to say, the discussion to follow is very tentative…
A third approach might be to introduce transport costs. Transporting goods from one country to another uses up resources, and from the point of view of maximising world income it will pay to minimise transport costs. Given that in the final equilibrium both countries will specialise, each country should then specialise on the good for which it has the relatively greater demand, since this will minimise transporting. This seems obvious. Provided we do not introduce other complications, trade along Linder lines will maximise potential world income. But it does not seem so easy to prove that trade will actually assume that pattern. Suppose that, for some reason, one starts with the trade flow in the opposite direction. One might explain this in terms of some dynamic considerations. Will there then be a natural tendency for the pattern of specialisation and hence the flow of trade to reverse itself? It does not seem obvious that this would be so. There is scope for further theoretical explorations here.
As Krugman himself has commented: “Now it is always tricky to reread old texts in the light of subsequent information; knowing what actually happened, you can probably find a prophecy of Nostradamus that fits the event, and knowing subsequent developments in economic theory, you can probably find most of it hinted at in Ibn Khaldun.” Still, I think Corden was onto something in 1970.
You’ve no doubt noticed that recently I’ve only been posting once or twice per month. However, I am regularly sharing links and brief comments on Twitter, so you should follow @TradeDiversion. Recently on the Twitter feed (but not the blog):
- 13 May: Summer conferences: Schedules for Princeton IES and NBER ITI are up. http://www.princeton.edu/~ies/workshop.htm & http://users.nber.org/~confer/2013/SI2013/ITI/itiprg.html
- 12 May: World trade: Fresh blood http://econ.st/10uiFGB “The fate of the WTO’s Doha round is in the hands of two new trade officials” @TheEconomist
- 12 May: Kiminori Matsuyama’s symmetry-breaking model of endogenous comparative advantage is forthcoming in Econometrica: http://faculty.wcas.northwestern.edu/~kmatsu/
- 10 May: John Taylor relays rumors that “World Bank will water down or even abandon its ten-year old Doing Business” measures. http://economicsone.com/2013/05/09/10-years-doing-business-measuring-results-and-now-bill-gates/
I haven’t seen the inside of John McLaren’s new international trade textbook, but I really like the cover:
Who’s on the job market this year with a paper on international trade? As usual, I focus on trade papers, thereby neglecting international finance and open-economy macro papers and trade economists working in other fields. I’m a bit late this year, so please help me by identifying more candidates in the comments section. [Update: Thanks to Rm and Bernardo for their comments.]
- Assaf Zimring (Stanford) – Gains from Trade: Lessons from The 2007-2010 Gaza Blockade
- Qi Zhang (LSE) – Income Distribution and the Price Level: The Balassa-Samuelson Relationship Re-considered
- Hongsong Zhang (PSU) - Static and Dynamic Gains from Importing Intermediate Inputs: Theory and Evidence
- Christopher Tonetti (NYU) – Equilibrium Technology Diffusion, Trade, and Growth
- Felix Tintelnot (PSU) – Global Production with Export Platforms
- Tomasz Swiecki (Princeton) – Intersectoral Distortions, Structural Change and the Welfare Gains from Trade
- Joseph Shapiro (MIT) – Trade, CO₂, and the Environment
- Fernando Perez Cervantes (Chicago) – Railroads and Economic Growth: A Trade Policy Approach
- Dan Murphy (Michigan) – Why are Goods and Services more Expensive in Rich Countries? Demand Complementarities and Cross-Country Price Differences
- Julien Martin (Louvain) - The Few Leading the Many: Foreign Affiliates and Business Cycle Comovement
- Yanping Liu (PSU) – Capital Adjustment Costs: Implications for Domestic and Export Sales Dynamics
- Fernando Leibovici (NYU) – Financial Development and International Trade
- Attakrit Leckcivilize (LSE) – The Impact of Supply Chain Disruptions: Evidence from the Japanese Tsunami
- Sarah Kroeger (BU) – The Contribution of Offshoring to the Convexification of the U.S. Wage Distribution
- James Key (PSU) – Priors and Posteriors: Implications for Exporters
- Leo Karasik (U Toronto) – The Role of Regional Portfolios in the Affiliate Location Decision of Multinational Firms
- Fadi Hassan (LSE) – The Price of Development
- John Feddersen (Oxford) – Pollution Havens: Does Third Country Environmental Policy Matter?
- Benjamin Faber (LSE) – Trade Liberalization, the Price of Quality, and Inequality: Evidence from Mexican Store Prices
- Javier Cravino (UCLA) – Exchange Rates, Aggregate Productivity and the Currency of Invoicing of International Trade
- Bo-Young Choi (UC Davis) – The Differential Effect of Trade Liberalization When Buyer Power is Present
- Samuel Bazzi (UCSD) – Wealth Heterogeneity, Income Shocks, and International Migration: Theory and Evidence from Indonesia
- Jose Asturias (Minnesota) – Endogenous Transportation Costs
Here’s an analytic framework that’s almost surely wrong:
What do market economies have to do with cities?
Well, obviously cities are economic entities. To survive, a city or a region has to make money; it has to export more than it imports, in dollar terms. Cities that decline are on the losing side of this equation. So if you care about cities, which I do, it leads you to think about how they function as economic entities.
Alex Marshall’s new book doesn’t mention exports in the context of cities, so I don’t have a way to follow up on the logic underlying this claim. But trade surpluses are not at the heart of urban growth in any urban economics literature I’ve read.
[HT: Aaron Brown]
If you aren’t following Trade Diversion on Twitter, here’s what you missed recently:
- Senators propose bill to require U.S. Olympic uniforms be American-made [Fox News]
- Dan Ikenson on “Reid’s Bonfire of the Inanities“
- Conor Friedersdorf on “President Obama’s Disingenuous Attack on Outsourcing“
- Young readers — want to be a trade policy research assistant at @CatoInstitute? See http://worldtradelaw.typepad.com/ielpblog/2012/07/trade-policy-research-assistant-position.html (via @WorldTradeLaw)