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Technology Advantage and Trade: Home Market Effects Revisited

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    According to conventional home market effects, free trade tends to shrink the market share for the smaller economy in the differentiated manufacturing goods, and in the extreme, leads to a complete hollowing out of the industry. In departing from the original Helpman-Krugman modeling assumptions behind the home market effects, we introduce technology differences between trading partners and prove that the home market effects will be offset and will even reverse if the small economy has better technology than the other country. We also prove that even with identical country size, the intra-industry trade addressed in the existing literature may not occur; it will occur only if the technology differential lies within a certain range that is positively affected by the level of transport cost.

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    Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 06-A011.

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    Length: 27 pages
    Date of creation: Oct 2006
    Date of revision:
    Handle: RePEc:sin:wpaper:06-a011
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    1. 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.
    2. Davis, D.R., 1997. "The Home Market, Trade, and Industrial Structure," Papers 597, Harvard - Institute for International Development.
    3. Gordon H. Hanson & Chong Xiang, 2002. "The Home Market Effect and Bilateral Trade Patterns," Working Papers 481, Research Seminar in International Economics, University of Michigan.
    4. 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.
    5. Behrens, Kristian, 2005. "Market size and industry location: Traded vs non-traded goods," Journal of Urban Economics, Elsevier, vol. 58(1), pages 24-44, July.
    6. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    7. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
    8. Toru Kikuchi, 2001. "A Note on the Distribution of Trade Gains in a Model of Monopolistic Competition," Open Economies Review, Springer, vol. 12(4), pages 415-421, October.
    9. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 430-447, May.
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