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Home Market Effect, Spatial Efficiency of Industries, and the Dynamic Evolution of China’s Comparative Advantages

In: China's Qualitative Economic Transformation

Author

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  • Ya Li

    (Yunnan University)

Abstract

Ceteris paribus, if a country or region has a particularly high demand on a certain commodity, will it import or export this product? The traditional theories tell us “Import.” This is because in the traditional H-O model, division of labor and trade is based on comparative advantages resulting from regional differences in factor endowments. Each country or region tends to export commodities that are produced intensively using more abundant factors of production. In 1951, however, Leontief discovered, by analyzing input and output, that the US exported labor-intensive commodities and imported capital-intensive products. This is known as “the Leontief Paradox.” Over the past decades, people have added various factors to the H-O model, hoping to explain “the Leontief Paradox.” For example, the theory of spatial economics—represented by Krugman—put forward a proposition: for industries of increasing returns, the particularly high domestic demand is exactly the reason to export such products. That is to say, if a region has an “extraordinary demand” for a certain product, this special demand in the local market has an “amplification effect” that causes the growth of production to be greater than that of demand in this region, thus causing it to export such a product. This is an important concept of spatial economics: the home market effect (HME). The origin of the amplification effect of such an “extraordinary demand” is the increasing returns to scale and the agglomeration effect. In this chapter, we will study China’s regional industries in light of comparative advantages and the “home market effect.” According to our observation, as comparative advantages based on factor endowments keep upgrading, those based on economies of scale are also becoming prominent. Following the economies of scale, the “home market effect” can well explain the spatial structure of Chinese industries. Derived from Krugman’s new trade theory, the “home market effect” has some important enlightenment for regional industrial development in China.

Suggested Citation

  • Ya Li, 2023. "Home Market Effect, Spatial Efficiency of Industries, and the Dynamic Evolution of China’s Comparative Advantages," Springer Books, in: Xianming Yang (ed.), China's Qualitative Economic Transformation, chapter 0, pages 151-169, Springer.
    • Handle: RePEc:spr:sprchp:978-981-19-4437-6_6
    DOI: 10.1007/978-981-19-4437-6_6
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