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The Home Market Shadow

  • Suedekum, Jens


    (Heinrich Heine University Düsseldorf)

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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1462.

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Length: 18 pages
Date of creation: Jan 2005
Date of revision:
Publication status: published in: Journal of Economics, 2007, 92 (3), 208-229
Handle: RePEc:iza:izadps:dp1462
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  1. 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.
  2. Diego Puga & Anthony J. Venables, 1995. "Preferential Trading Arrangements and Industrial Location," CEP Discussion Papers dp0267, Centre for Economic Performance, LSE.
  3. 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.
  4. Davis, Donald R. & Weinstein, David E., 1999. "Economic geography and regional production structure: An empirical investigation," European Economic Review, Elsevier, vol. 43(2), pages 379-407, February.
  5. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  6. Keith Head & Thierry Mayer, 2004. "The Empirics of Agglomeration and Trade," Post-Print hal-01027789, HAL.
  7. Keith Head & Thierry Mayer & John Ries, 2002. "On the Pervasiveness of Home Market Effects," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00267444, HAL.
  8. Ottaviano, Gianmarco & Thisse, Jacques-François, 1998. "Agglomeration and Trade Revisited," CEPR Discussion Papers 1903, C.E.P.R. Discussion Papers.
  9. repec:spo:wpecon:info:hdl:2441/10191 is not listed on IDEAS
  10. 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.
  11. Richard Baldwin & Rikard Forslid & Philippe Martin & Gianmarco Ottaviano & Frederic Robert Nicoud, 2003. "Economic Geography and Public Policy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00179815, HAL.
  12. 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.
  13. 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.
  14. 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.
  15. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g8o4o0m0g is not listed on IDEAS
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