Market size, trade, and productivity reconsidered: poverty traps and the home market effect

Berliant, Marcus and Tabuchi, Takatoshi (2024): Market size, trade, and productivity reconsidered: poverty traps and the home market effect.

Abstract

To investigate questions related to migration and trade, a model of regional or international development is created by altering Melitz and Ottaviano (2008) to include a labor market. The model is then applied to analyze poverty traps and the home market effect. We find that in the spatial economics context of migration but no trade, poverty can persist unless population in one region of many is pushed past a threshold. Then growth commences. In the context of trade but no migration, the home market effect holds for a range of parameters, similar to previous literature. However, unlike previous literature, we find that if populations in the countries are large, the home market effect can be reversed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monopolistic competition; Poverty trap; Home market effect; Labor market clearing
• Subjects: F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R11 - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

References

Arkolakis, C., 2008. "Market Penetration Costs and the New Consumers Margin." NBER Working Paper 14214.

Azariadis, C., 1996. "The Economics of Poverty Traps Part One: Complete Markets." Journal of Economic Growth 1, 449-486.

Behrens, K., A.R. Lamorgese, G.I.P. Ottaviano and T. Tabuchi, 2009. "Beyond the Home Market Effect: Market Size and Specialization in a Multi-country World." Journal of International Economics 79, 259-265.

Berliant, M. and P. Wang, 2008. "Urban Growth and Subcenter Formation: A Trolley Ride from the Staples Center to Disneyland and the Rose Bowl." Journal of Urban Economics 63, 679-693.

Costinot, A., D. Donaldson, M. Kyle, and H. Williams, 2019. "The More We Die, the More We Sell? A Simple Test of the Home-Market Effect." Quarterly Journal of Economics 134, 843-894.

Crozet, M. and F. Trionfetti, 2008. "Trade Costs and the Home Market Effect." Journal of International Economics 76, 309-321.

Deimling, K., 1977. Ordinary Differential Equations in Banach Spaces, Springer-Verlag, Berlin.

Demidova, S., 2017. "Trade Policies, Firm Heterogeneity, and Variable Markups." Journal of International Economics 108, 260-273.

Forslid, R. and G.I.P. Ottaviano, 2003. "An Analytically Solvable Core-Periphery Model," Journal of Economic Geography 3, 229--240.

Fujita, M., 1989. Urban Economic Theory: Land Use and City Size, Cambridge: Cambridge University Press.

Fukao, K. and R.J.M. Bénabou, 1993. "History versus Expectations: A Comment," Quarterly Journal of Economics 108, 535--542.

Grubel, H.G. and P.J. Lloyd, 1975. Intra-Industry Trade: The Theory and Measurement of International Trade in Differentiated Products, London: MacMillan.

Hanson, G.H. and C. Xiang, 2004. "The Home-Market Effect and Bilateral Trade Patterns," American Economic Review 94, 1108-1129.

Herrendorf, B., R. Rogerson, and Á. Valentinyi, 2014. "Growth and Structural Transformation." In: P. Aghion, S. Durlauf (eds.) Handbook of Economic Growth, Volume 2B, Amsterdam: Elsevier, 855-941.

Krugman, P., 1980. "Scale Economies, Product Differentiation and the Pattern of Trade." American Economic Review 70, 950-959.

Krugman, P., 1991a. "Increasing Returns and Economic Geography." Journal of Political Economy 99, 483-499.

Krugman, P., 1991b. "History versus Expectations." Quarterly Journal of Economics 106, 651--667.

Matsuyama, K., 2008. "Structural Change." In: S.N. Durlauf and L.E. Blume (eds.) New Palgrave Dictionary of Economics, 2nd Edition, London: Palgrave Macmillan, 13201-13206.

Mayer, J. 2018. "Robots and Industrialization: What Policies for Inclusive Growth?" Working Paper commissioned by the Group of 24 and Friedrich-Ebert-Stiftung New York.

Medin, H., 2017. "The Reverse Home-Market Effect in Exports: A Cross-Country Study of the Extensive Margin of Exports." Review of World Economics 153, 301-325.

Melitz, M.J., 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity." Econometrica 71, 1695-1725.

Melitz, M.J. and G.I.P. Ottaviano, 2008. "Market Size, Trade, and Productivity." Review of Economic Studies 75, 295-316.

Ottaviano, G., T. Tabuchi and J.-F. Thisse, 2002. "Agglomeration and Trade Revisited." International Economic Review 43, 409-436.