New trade theory International trade theory

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new trade theory tries explain empirical elements of trade comparative advantage-based models above have difficulty with. these include fact trade between countries similar factor endowment , productivity levels, , large amount of multinational production (i.e., foreign direct investment) exists. new trade theories based on assumptions such monopolistic competition , increasing returns scale. 1 result of these theories home-market effect, asserts that, if industry tends cluster in 1 location because of returns scale , if industry faces high transportation costs, industry located in country of demand, in order minimize cost.







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