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Testing the Home Market Effects in a Multi-country World: The Theory

  • Takatoshi Tabuchi
  • Kristian Behrens
  • Andrea R. Lamorgese

We extend the two-country model by Krugman (1980) to a multi-country set-up and show that the `home-market effect' highlighted with two countries does not readily extend to such a more general setting. In particular, we prove that the most important result, namely the disproportionate causation from demand to supply, generalizes only under the fairly implausible assumption of pairwise symmetric trade costs between all countries. We argue, therefore, that the implications of product differentiation for the structure of world trade are better characterized in terms of spatial (`accessibility') and non-spatial (`attraction') effects, and we provide a theory-based specification that suggests how to test the home market effect in a more general setting

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 595.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:595
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