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Market size, trade, and productivity reconsidered: poverty traps and the home market effect

Author

Listed:
  • Marcus Berliant

    (Washington University)

  • Takatoshi Tabuchi

    (Chuo University)

Abstract

To investigate questions related to migration and trade, a model of regional or international development is created by altering Melitz and Ottaviano (Rev Econ Stud 75:295–316, 2008) to include a labor market. The model is then applied to analyze poverty traps and the home market effect. We find that in the spatial economics context of migration but no trade, poverty can persist unless population in one region of many is pushed past a threshold. Then growth commences. In the context of trade but no migration, the home market effect holds for a range of parameters, similar to previous literature. However, unlike previous literature, we find that if populations in the countries are large, the home market effect can be reversed.

Suggested Citation

  • Marcus Berliant & Takatoshi Tabuchi, 2025. "Market size, trade, and productivity reconsidered: poverty traps and the home market effect," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(1), pages 99-124, April.
    • Handle: RePEc:spr:etbull:v:13:y:2025:i:1:d:10.1007_s40505-024-00283-9
    DOI: 10.1007/s40505-024-00283-9
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    More about this item

    Keywords

    Monopolistic competition; Poverty trap; Home market effect; Labor market clearing;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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