HOME MARKET EFFECTS IN THE CHAMBERLINIAN-RICARDIAN WORLD

ABSTRACT According to conventional home market effects, free trade tends to shrink the market share for a smaller economy in differentiated manufacturing goods, and in the extreme, leads to a complete hollowing out of the industry. Departing from the original Helpman–Krugman modelling assumptions be...

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Bibliographic Details
Published in:Bulletin of economic research 2014-12, Vol.66 (S1), p.S36-S54
Main Authors: Huang, Yo-Yi, Lee, Cheng-Te, Huang, Deng-Shing
Format: Article
Language:English
Subjects:
Costs
country size
Economic models
Economic research
Economies of scale
F12
Free trade
home market effects
Housing market
Impact analysis
Manufacturing
Marginality
Studies
Technology
technology differential
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Summary:ABSTRACT According to conventional home market effects, free trade tends to shrink the market share for a smaller economy in differentiated manufacturing goods, and in the extreme, leads to a complete hollowing out of the industry. Departing from the original Helpman–Krugman modelling assumptions behind the home market effects, we introduce a technology advantage in terms of the difference in fixed cost and/or marginal cost between trading partners and prove that home market effects will be offset and even reverse if a small economy has better technology than another country. With a higher elasticity of substitution, the marginal cost advantage becomes more important if it is to dominate the home market effect. We also show that even with an identical country size, the intra‐industry trade addressed in the existing literature may not occur; it will occur only if the technology differential lies within a certain range that is positively affected by the level of transport cost.
ISSN:0307-3378
1467-8586
DOI:10.1111/boer.12008