Does home market size matter for the pattern of trade? Krugman started the literature, showing it does matter. Davis overturned his result, arguing that an assumption of convenience - transport costs only for the differentiated goods - conveniently obtained the result. Here we relax another persistent assumption of convenience - two industry types differentiated only by the degree of scale economies - and find that market size reemerges as a relevant force in determining industrial structure.
Bibliographical noteFunding Information:
Holmes acknowledges support from the NSF through grant SES 0136842. The authors are grateful for helpful comments from the editor and the referees. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the National Science Foundation.
- Home market
- Increasing returns