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The Home Market Effect and the Agricultural Sector

  • Dao-Zhi Zeng


  • Toru Kikuchi


The "home market effect" (HME) is an essential topic of the new trade theory. Assuming the transport costs only for the manufacturing goods, Krugman (1980) shows that the country with bigger market size is a net exporter. The assumption of free transport of the agricultural good was shown mattering a great deal rather than being innocuous by Davis (1998). Particularly, when manufacturing and agricultural goods have identical transport costs, the HME disappears. However, we find that the homogeneous-agricultural-good assumption in Davis' model derives the discontinuity of inverse demand functions, which causes the disappearance of the HME. After establishing an analytical solvable model and assuming two differentiated agricultural goods in two countries, we find that the HME does exist even if the transport cost of the agricultural goods is positive.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa05p135.

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Date of creation: Aug 2005
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Handle: RePEc:wiw:wiwrsa:ersa05p135
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  1. Donald R. Davis, 1997. "The home market, trade, and industrial structure," Staff Reports 35, Federal Reserve Bank of New York.
  2. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 2003. "Agglomeration and economic geography," CORE Discussion Papers 2003016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g8o4o0m0g is not listed on IDEAS
  4. Keith Head & Thierry Mayer & John Ries, 2002. "On the pervasiveness of home market effects," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  5. 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.
  6. Marius Brülhart, 1998. "Economic Geography, Industry Location and Trade: The Evidence," The World Economy, Wiley Blackwell, vol. 21(6), pages 775-801, 08.
  7. 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.
  8. OTTAVIANO, Gianmarco & TABUCHI , Takatoshi & THISSE, Jacques-François, . "Agglomeration and trade revisited," CORE Discussion Papers RP 1553, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. PICARD, Pierre M. & ZENG, Dao-Zhi, . "Agricultural sector and industrial agglomeration," CORE Discussion Papers RP 1893, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Gordon H. Hanson & Chong Xiang, 2004. "The Home-Market Effect and Bilateral Trade Patterns," American Economic Review, American Economic Association, vol. 94(4), pages 1108-1129, September.
  11. Zhihao Yu, 2005. "Trade, market size, and industrial structure: revisiting the home-market effect," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 255-272, February.
  12. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  13. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, June.
  14. Holmes, Thomas J. & Stevens, John J., 2005. "Does home market size matter for the pattern of trade?," Journal of International Economics, Elsevier, vol. 65(2), pages 489-505, March.
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