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    Linder hypothesis

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    Suppose that you test the Linder hypothesis by comparing Germany's absolute difference in per capita income from each of its trading partners with the size of Germany's total trade with each respective partner. You find a strongly negative correlation. Do you thus conclude that the Linder hypothesis must necessarily offer a good explanation of Germany's trade? Why or why not?

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    The Linder hypothesis states that the more similar are the demand structures of countries the more they will trade with one another. The hypothesis therefore presents a demand based theory of trade, in contrast to the usual supply based theories involving factor endowments. The hypothesis also explains that countries with similar preferences and factor endowments will still trade by specializing on differentiated products and ...

    Solution Summary

    Linder hypothesis is assessed.