Home-market effect
Encyclopedia
The home market effect is a hypothesized concentration of certain industries in large markets. The home market effect became part of New Trade Theory
. Through trade theory, the home market effect is derived from models with returns to scale
and transportation costs. When it is cheaper for an industry to operate in a single country because of returns to scale, an industry will base itself in the country where most of its products are consumed in order to minimize transportation costs. The home market effect implies a link between market size and exports that is not accounted for in trade models based solely on comparative advantage
.
The home market effect first proposed by Corden and was developed by Paul Krugman
in a 1980 article. Krugman sought to provide an alternative to the Linder hypothesis
. Based on recent research, the home market effect confirms Linder's sentiment that a nation's demand is a predicate for its exports, but does not support Linder's claim that differences in countries' preferences impede trade.
New Trade Theory
New Trade Theory is a collection of economic models in international trade which focuses on the role of increasing returns to scale and network effects, which were developed in the late 1970s and early 1980s....
. Through trade theory, the home market effect is derived from models with returns to scale
Returns to scale
In economics, returns to scale and economies of scale are related terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable...
and transportation costs. When it is cheaper for an industry to operate in a single country because of returns to scale, an industry will base itself in the country where most of its products are consumed in order to minimize transportation costs. The home market effect implies a link between market size and exports that is not accounted for in trade models based solely on comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
.
The home market effect first proposed by Corden and was developed by Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
in a 1980 article. Krugman sought to provide an alternative to the Linder hypothesis
Linder hypothesis
The Linder hypothesis is a economics conjecture about international trade patterns: The more similar the demand structures of countries, the more they will trade with one another...
. Based on recent research, the home market effect confirms Linder's sentiment that a nation's demand is a predicate for its exports, but does not support Linder's claim that differences in countries' preferences impede trade.