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Gravity, market potential and development

  • Keith Head

    (Sauder School of Business [British Columbia])

  • Thierry Mayer

    (Département d'économie)

This article provides evidence on the long-term impact of market potential on economic development. It derives from the New Economic Geography literature a structural estimation where the level of factors' income of a country is related to its proximity to large markets, referred to as ‘market potential’. The empirical part evaluates this market potential for all countries in the world with available trade data over the 1965–2003 period and relates it to income per capita. Overall results show that market potential is a powerful driver of increases in income per capita.

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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/c8dmi8nm4pdjkuc9g8mb6c01j.

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Date of creation: 2011
Date of revision:
Publication status: Published in Journal of Economic Geography, 2011, vol. 11, pp.281-294
Handle: RePEc:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g8mb6c01j
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  1. Redding, Stephen J. & Schott, Peter K., 2003. "Distance, Skill Deepening and Development: Will Peripheral Countries Ever Get Rich?," CEPR Discussion Papers 3739, C.E.P.R. Discussion Papers.
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  10. Head, Keith & Mayer, Thierry, 2002. "Market Potential and the Location of Japanese Investment in the European Union," CEPR Discussion Papers 3455, C.E.P.R. Discussion Papers.
  11. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
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  17. Fingleton, Bernard, 2008. "Competing models of global dynamics: Evidence from panel models with spatially correlated error components," Economic Modelling, Elsevier, vol. 25(3), pages 542-558, May.
  18. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  19. Gilles Duranton & Vassilis Monastiriotis, 2002. "Mind the Gaps: The Evolution of Regional Earnings Inequalities in the U.K., 1982-1997," Journal of Regional Science, Wiley Blackwell, vol. 42(2), pages 219-256.
  20. Mion, Giordano & Naticchioni, Paolo, 2005. "Urbanization Externalities, Market Potential and Spatial Sorting of Skills and Firms," CEPR Discussion Papers 5172, C.E.P.R. Discussion Papers.
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