Skip to main content

The Home Market and the Pattern of Trade: Round Three

Staff Report 304 | Published April 1, 2002

Download PDF

Authors

John J. Stevens Board of Governors of the Federal Reserve System

The Home Market and the Pattern of Trade: Round Three

Abstract

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.