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Country Size, Economic Structure and Transaction Efficiency: An Asymmetric Spatial General Equilibrium Model of Income Differences across Nations

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  • Junhua Li
  • Wenli Cheng

Abstract

Income differences across countries are jointly determined by many factors. Population size and per capita resource endowments are two important natural characteristics of countries. A large population size means that the country can produce more product varieties, achieve a higher degree of division of labor and enjoy relatively more local knowledge spillover. Another significant source of the large country advantage is savings in international transaction costs. When international transaction costs are high, a large country still has a large domestic market, and therefore can have a higher per capita income than a small country. However, many factors can conspire to erode the large country advantage and as a result, a large country may not have a higher per capital income than a small country. These compromising factors include: trade openness, excessive population density and its resultant falling per capita resources, underdeveloped domestic market and high domestic transaction costs, an economic structure that excessively relies on land and natural resources, and low technology levels.

Suggested Citation

  • Junhua Li & Wenli Cheng, 2015. "Country Size, Economic Structure and Transaction Efficiency: An Asymmetric Spatial General Equilibrium Model of Income Differences across Nations," Monash Economics Working Papers 17-15, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2015-17
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2015/1715incomedifferencesacrossnationslicheng.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Cross-Country Income Differences; Large Country Advantage; Economies of Specialisation; Trade Openness;

    JEL classification:

    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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