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The Home Market Effect and the Agricultural Sector

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  • Dao-Zhi Zeng

    ()

  • Toru Kikuchi

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Abstract

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.

Suggested Citation

  • Dao-Zhi Zeng & Toru Kikuchi, 2005. "The Home Market Effect and the Agricultural Sector," ERSA conference papers ersa05p135, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa05p135
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    1. Ottaviano, Gianmarco & Thisse, Jacques-Francois, 2004. "Agglomeration and economic geography," Handbook of Regional and Urban Economics,in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 58, pages 2563-2608 Elsevier.
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    13. Picard, Pierre M. & Zeng, Dao-Zhi, 2005. "Agricultural sector and industrial agglomeration," Journal of Development Economics, Elsevier, pages 75-106.
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    17. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g8o4o0m0g is not listed on IDEAS
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