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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. 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.
  2. Head, Keith & Mayer, Thierry & Ries, John, 2002. "On the Pervasiveness of Home Market Effects," Economica, London School of Economics and Political Science, vol. 69(275), pages 371-90, August.
  3. 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).
  4. OTTAVIANO, Gianmarco & THISSE, Jacques-François, . "Agglomeration and economic geography," CORE Discussion Papers RP -1725, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. 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).
  6. 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.
  7. Donald R. Davis & David E. Weinstein, 1998. "Economic geography and regional production structure: an empirical investigation," Staff Reports 40, Federal Reserve Bank of New York.
  8. Davis, D.R., 1997. "The Home Market, Trade, and Industrial Structure," Papers 597, Harvard - Institute for International Development.
  9. 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.
  10. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  11. Marius Brülhart, 1998. "Economic Geography, Industry Location and Trade: The Evidence," The World Economy, Wiley Blackwell, vol. 21(6), pages 775-801, 08.
  12. 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.
  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. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g8o4o0m0g is not listed on IDEAS
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