Date of This Version
January 2010
Abstract
The standard two-country model of international trade with monopolistic competition predicts a more-than-proportional relationship between a country’s share of world production of a good and its share of world demand for that same good, a result known as the “home market effect”. We first show that this prediction does not generally carry through to the multi-country case, as production patterns are crucially affected by third country effects. We then derive an alternative prediction that holds whatever the number of countries considered. This new prediction takes into account important features of the real world such as comparative advantage due to cross-country technological differences and lack of factor price equalization.
Recommended Citation
Ottaviano, Gianmarco; Behrens, Kristian; Lamorgese, Andrea R.; and Tabuchi, Takatoshi, "Beyond the Home Market Effect: Market Size and Specialization in a Multi-Country World" (January 11, 2010). Fondazione Eni Enrico Mattei Working Papers. Paper 383.
https://services.bepress.com/feem/paper383