The Home Market, Trade, and Industrial Structure
Does national market size matter for industrial structure? This has been suggested by theoretical work on "home market" effects, as in Krugman (1980, 1995). In this paper, I show that what previously was regarded as an assumption of convenience - transport costs only for the differentiated goods - matters a great deal. In a focal case in which differentiated and homogeneous goods have identical transport costs, the home market effect disappears.
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