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Market Integration and Industrial Structure: Home Market Effects Revisited

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  • Zhihao Yu

    (University of Nottingham)

Abstract

Does market size matter for industrial structure? This paper generalises the theory on home market effects to reconcile the recent debate by allowing for an endogenous expenditure share on differentiated goods. It is shown that, in general, market size matters for industrial structure. Even when both sectors face identical transport costs, a "home market effect" can arise, disappear, or reverse in sign, depending on whether the elasticity of substitution between the homogenous good and the composite of differentiated goods is greater than, equal to, or less than one. It is also shown that a commonly used benchmark - the relative market size in a one-factor economy - for discussing trade and industrial structure is, in general, not correct. The results should change common perceptions about how market integration affects a country's industrial structure. In particular, it is not always correct to consider a country that ends up with a less-than-proportionate of manufacturing industry in market integration to be "de-industrialised".

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0033.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0033

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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  2. Marius Brulhart & Federico Trionfetti, 2000. "Home-Biased Demand and International Specialisation: A Test of Trade Theories," Econometric Society World Congress 2000 Contributed Papers 0031, Econometric Society.
  3. Donald R. Davis, 1997. "The Home Market, Trade, and Industrial Structure," NBER Working Papers 6076, National Bureau of Economic Research, Inc.
  4. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  5. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  6. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, vol. 11(4), pages 531-551, November.
  7. Weder, Rolf, 1995. "Linking Absolute and Comparative Advantage to Intra-industry Trade Theory," Review of International Economics, Wiley Blackwell, vol. 3(3), pages 342-54, October.
  8. Robert C. Feenstra & James A. Markusen & Andrew K. Rose, 1998. "Undertstanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods," NBER Working Papers 6804, National Bureau of Economic Research, Inc.
  9. F Trionfetti, 1999. "On the Home Market Effect: Theory and Empirical Evidence," CEP Discussion Papers dp0430, Centre for Economic Performance, LSE.
  10. Donald R. Davis & David E. Weinstein, 1998. "Market Access, Economic Geography and Comparative Advantage: An Empirical Assessment," Harvard Institute of Economic Research Working Papers 1850, Harvard - Institute of Economic Research.
  11. Krugman, Paul & Venables, Anthony J., 1990. "Integration and the Competitiveness of Peripheral Industry," CEPR Discussion Papers 363, C.E.P.R. Discussion Papers.
  12. James Brander, 1980. "Intra-Industry Trade in Identical Commodities," Working Papers 380, Queen's University, Department of Economics.
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