The Home Market Shadow
18 Pages Posted: 19 Jan 2005
Date Written: January 2005
Abstract
The home market effect (HME) is a distinguishing feature of the "new" theory of international trade, but it is uncertain whether this effect survives if one moves beyond the simplifying setup with only two countries. We present a three-country version of the seminal model by Krugman (1980) and analyse under which circumstances the HME is present once third country effects are taken into account. We show that an exogenous increase in the home country's expenditure level on the modern good will unambiguously lead to an over-proportional output reaction. If production in the foreign world shifts from a more remote to a better accessible economy, industry location in the home country is negatively affected. Thus, if the expenditure increase is small relative to the foreign expenditure shifting, an under-proportional output reaction in the home country can result. In a more extreme case the industry share of the home country can even decrease. This phenomenon is labelled the "home market shadow".
Keywords: new trade theory, home market effect, hub effect
JEL Classification: F12, F14, R12
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Empirics of Agglomeration and Trade
By Keith Head and Thierry Mayer
-
Market Access, Economic Geography, and Comparative Advantage: an Empirical Assessment
-
Economic Geography and Regional Production Structure: An Empirical Investigation
-
Economic Geography and Reginal Production Structure: An Empirical Investigation
-
The Home Market Effect and Bilateral Trade Patterns
By Gordon H. Hanson and Chong Xiang
-
On the Pervasiveness of Home Market Effects
By Keith Head, Thierry Mayer, ...
-
On the Pervasiveness of Home Market Effects
By Keith Head, Thierry Mayer, ...