A Decomposition of the Home-Market Effect
Although the home-market effect has become one of the most important concepts in both trade theory and the new economic geography, it lacks a compelling graphical representation. The purpose of this note is to offer such a representation. We will decompose the homemarket effect into two steps: a short-run response to population shift, creating entry-stimulating excess profits (in the short run) for firms of the country that experiences a population gain, and a further round of entries into the monopolistic sector of the expanding country induced by exits in the foreign industry.
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