New Horizons in International Business series
Edited by Jean-Louis Mucchielli and Thierry Mayer
Chapter 7: The home market effect in a Ricardian model with a continuum of goods
7. The home market eﬀect in a Ricardian model with a continuum of goods Federico Trionfetti INTRODUCTION 7.1 An interesting new development in the international trade literature has made important advancements in the attempt to distinguish empirically between various models of international specialization and trade. Research in this stream has developed along both a theoretical and an empirical path that are complementary to each other. Theoretically, the task is to identify a testable discriminating criterion; that is, an observable relationship between endogenous and exogenous variables that is compatible with one model and incompatible with the alternative(s). The empirical task is to verify whether such a prediction is observed empirically. If the predicted relation is observed empirically, then the model with which it is compatible is empirically the true model to the exclusion of all other models. The discriminating criteria so far utilized in the literature are variants of the ‘home market’ or ‘market size’ eﬀect. Broadly speaking the market size eﬀect establishes a relation between demand and output: it says that – ceteris paribus – a country’s share of world demand is reﬂected more than proportionally on the country’s share of world output. Thus, a country with larger than average demand (market) for good X will host a more than proportionally larger than average share of world output of good X. The market size eﬀect is a prediction of models characterized by increasing returns and imperfect competition, while it is typically not a prediction of constant...
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