Staff Report 304

The Home Market and the Pattern of Trade: Round Three

Thomas J. Holmes | University of Minnesota, Federal Reserve Bank of Minneapolis
John J. Stevens | Board of Governors of the Federal Reserve System

Published April 1, 2002

Does national market size matter for industrial structure? Round One (Krugman) answered in the affirmative: Home market effects matter. Round Two (Davis) refuted this, arguing that an assumption of convenience—transport costs only for the differentiated goods—conveniently obtained the result. In Round Three 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.

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