Home Market Effect, Gravity Model, MC Framework Flashcards
In larger markets what are higher
Productivity and wages
Hypothesis of Paul Krugman’s model on international trade
Claims that countries with a large home market will have a large share of the international market
If production was always subject to constant returns to scale
production would be dispersed
Under high trade costs…
locate production in a region with many customers
Larger region attracts…
A larger than proportional share of firms and investment into the sector characterised by increasing returns
Manufactured goods vs agricultural goods location
Larger regions export manufactured goods, import agricultural because agricultural has same scale economies everywhere.
Smaller region will be a net exporter of capital to the larger region because
greater agglomeration forces in large region pushes capital towards it from higher return. Greater agglomeration forces in large region pushes capital towards it from higher return
Importance of trade cost
Cheaper trade - more capital flows from small to large region. More concentration in larger region. Also depends on the gap between large and small - bigger the gap the more capital flows
Limitation of HME
Labour is not actually stuck even if capital is more mobile
Hanson and Xiang (2004) Model
Industries with high transport costs and more differentiated products tend to be more concentrated in large countries
Davis and Weinstein, 2002
Find that locational advantages have established spatial patterns of location. Increasing returns help to determine the degree of spatial differentiation
Hypothesize that agglomeration economies must have been less important for historical settlement. But there has always been great variety in population densities.
As Japan industrialized and became integrated in the world economy, there is a notable rise in concentration.
Path Dependence
When today’s outcomes are contingent on history, they are subject to path dependence.
Local institutions, social networks, persistence of entrepreneurship or human capital, local culture
Traditional location of strong industries have strong incentives to further locate production
Dixit Stiglitz Equation derived
v
Implications for policymakers of path dependence
Path dependent processes are self-reinforcing. Politician’s best friend and worst enemy
Successful policy can be incredibly cheap. Unsuccessful policy even more destructive
Hard to go wrong when in spiral (London) and hard to do right when negative trend (Left-Behind Regions)
Gravity Equation Formulation
Xrs = G * Yr Ys /Drs
Exports from country R to S where Y is the GDPs, d is the distance
Oldest evidence of gravity model
Barjamovic et al. (2019) is the oldest estimated gravity model. They use their data to:
Shows that a gravity model well describes trade patterns in the bronze age.
Show the distribution of city sizes and demonstrate that cities tended to emerge at the intersection of important trade routes.
