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The Home Market Shadow

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  • Jens Südekum

    ()
    (Department of Economics, University of Konstanz)

Abstract

The home market effect (HME) is a distinguishing feature of the "new" theory of international trade, but it is uncertain whether this effect survives if one moves beyond the simplifying setup with only two countries. We present a three-country version of the seminal model by Krugman (1980) and analyse under which circumstances the HME is present once third country effects are taken into account. We show that an exogenous increase in the home country's expenditure level on the modern good will unambiguously lead to an over-proportional output reaction. If production in the foreign world shifts from a more remote to a better accessible economy, industry location in the home country is negatively affected. Thus, if the expenditure increase is small relative to the foreign expenditure shifting, an under-proportional output reaction in the home country can result. In a more extreme case the industry share of the home country can even decrease. This phenomenon is labelled the �home market shadow".

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Bibliographic Info

Paper provided by Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim in its series Working Papers of the Research Group Heterogenous Labor with number 05-01.

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Length: 18 pages
Date of creation: 12 Jan 2005
Date of revision:
Handle: RePEc:knz:hetero:0501

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Keywords: new trade theory ; home market effect ; hub effect;

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References

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  1. Diego Puga & Tony Venables, 1995. "Preferential trading arrangements and industrial location," LSE Research Online Documents on Economics 2151, London School of Economics and Political Science, LSE Library.
  2. Marius BRÜLHART & Federico TRIONFETTI, 2001. "A Test of Trade Theories when Expenditure is Home Biased," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.11, Université de Lausanne, Faculté des HEC, DEEP.
  3. 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.
  4. Keith Head & Thierry Mayer, 2004. "The Empirics of Agglomeration and Trade," Sciences Po publications info:hdl:2441/10191, Sciences Po.
  5. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g8o4o0m0g is not listed on IDEAS
  6. Keith Head & Thierry Mayer & John Ries, 2000. "On the Pervasiveness of Home Market Effects," Econometric Society World Congress 2000 Contributed Papers 0862, Econometric Society.
  7. Donald R. Davis & David E. Weinstein, 1997. "Economic Geography and Regional Production Structure: An Empirical Investigation," Harvard Institute of Economic Research Working Papers 1802, Harvard - Institute of Economic Research.
  8. Baldwin, Richard E. & Venables, Anthony J., 1995. "Regional economic integration," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 31, pages 1597-1644 Elsevier.
  9. Davis, Donald R. & Weinstein, David E., 2003. "Market access, economic geography and comparative advantage: an empirical test," Journal of International Economics, Elsevier, vol. 59(1), pages 1-23, January.
  10. Kristian Behrens & Andrea R. Lamorgese & Gianmarco I.P. Ottaviano & Takatoshi Tabuchi, 2005. "Testing the 'home market effect' in a multi-country world: A theory-based approach," Temi di discussione (Economic working papers) 561, Bank of Italy, Economic Research and International Relations Area.
  11. repec:spo:wpecon:info:hdl:2441/10191 is not listed on IDEAS
  12. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  13. Federico Trionfetti, 2001. "Using home-biased demand to test trade theories," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 137(3), pages 404-426, September.
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Cited by:
  1. Behrens, Kristian & Lamorgese, Andrea & Ottaviano, Gianmarco Ireo Paolo & Tabuchi, Takatoshi, 2005. "Changes in Infrastructure and Tariff Barriers: Local Vs. Global Impacts," CEPR Discussion Papers 5103, C.E.P.R. Discussion Papers.

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