Income Distribution, Market Size, and Industrialization
Kevin M. Murphy
University of Chicago; National Bureau of Economic Research (NBER)
Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Robert W. Vishny
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
NBER Working Paper No. w2709
When world trade is not free and costless, a less developed country can profitably industrialize only if its domestic markets are large enough. In such a country, for increasing returns technologies to break even, sales must be high enough to cover the set-up costs, This paper studies some determinants of the size of the domestic market, and focuses on two conditions conducive to industrialization. First, agriculture or exports must provide the source of autonomous demand for manufactures. Such expansion of autonomous demand usually results from increases in farm productivity or from opening of new export markets. Second, income generated in agriculture or exports must be broadly enough distributed that it materializes as demand for mass-produced domestic goods, and not just for luxuries. We resort to these two determinants of the size of domestic markets to interpret several historical development episodes.
Number of Pages in PDF File: 41
Date posted: June 11, 2007
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