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Technology Advantage and Trade: Home Market Effects Revisited

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Author Info

  • Deng-Shing Huang

    ()
    (Institute of Economics, Academia Sinica, Taipei, Taiwan)

  • Yo-Yi Huang

    (Institute of Applied Economics, National Taiwan Ocean University, Taiwan)

  • Cheng-Te Lee

    (Department of International Trade, Chinese Culture University, Taiwan)

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    Abstract

    According to conventional home market effects, free trade tends to shrink the market share for the smaller economy in the differentiated manufacturing goods, and in the extreme, leads to a complete hollowing out of the industry. In departing from the original Helpman-Krugman modeling assumptions behind the home market effects, we introduce technology differences between trading partners and prove that the home market effects will be offset and will even reverse if the small economy has better technology than the other country. We also prove that even with identical country size, the intra-industry trade addressed in the existing literature may not occur; it will occur only if the technology differential lies within a certain range that is positively affected by the level of transport cost.

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    Bibliographic Info

    Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 06-A011.

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    Length: 27 pages
    Date of creation: Oct 2006
    Date of revision:
    Handle: RePEc:sin:wpaper:06-a011

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    Related research

    Keywords: Home market Effects; Country Size; Technology Differential;

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    References

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    1. Davis, D.R., 1997. "The Home Market, Trade, and Industrial Structure," Papers 597, Harvard - Institute for International Development.
    2. Behrens, Kristian, 2005. "Market size and industry location: Traded vs non-traded goods," Journal of Urban Economics, Elsevier, vol. 58(1), pages 24-44, July.
    3. Head, Charles Keith & Mayer, Thierry & Ries, John, 2002. "On the Pervasiveness of Home Market Effects," CEPR Discussion Papers 3454, C.E.P.R. Discussion Papers.
    4. Toru Kikuchi, 2001. "A Note on the Distribution of Trade Gains in a Model of Monopolistic Competition," Open Economies Review, Springer, vol. 12(4), pages 415-421, October.
    5. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
    6. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
    7. Gordon H. Hanson & Chong Xiang, 2002. "The Home Market Effect and Bilateral Trade Patterns," Working Papers 481, Research Seminar in International Economics, University of Michigan.
    8. 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.
    9. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 430-447, May.
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