50th Congress of the European Regional Science Association: "Sustainable Regional Growth and Development in the Creative Knowledge Economy", 19-23 August 2010, Jönköping, Sweden
Empirically, Trefler (1995) shows that actual trade flows deviate from predictions based on factor abundance theory in a systematic way (which he calls the 'case of the missing trade'). Theoretically, Courant and Deardorff (1992) show that an uneven distribution of factors of production across regions within a country (which they call 'lumpiness') affect aggregate trade flows at the country level. In particular, a country tends to export the good that intensively uses its more unevenly distributed factor of production. Based on the urban economics literature, we use a simple measure of the degree of lumpiness to show that Trefler's missing trade flows are systematically related to our measure of the degree of lumpiness. This implies that not only home bias and technology differences may explain the missing trade flows, but also the uneven distribution of factors of production.