Country Size, Economic Structure and Transaction Efficiency: An Asymmetric Spatial General Equilibrium Model of Income Differences across Nations

Income differences across countries are jointly determined by many factors. Population size and per capita resource endowments are two important natural characteristics of countries. A large population size means that the country can produce more product varieties, achieve a higher degree of division of labor and enjoy relatively more local knowledge spillover. Another significant source of the large country advantage is savings in international transaction costs. When international transaction costs are high, a large country still has a large domestic market, and therefore can have a higher per capita income than a small country. However, many factors can conspire to erode the large country advantage and as a result, a large country may not have a higher per capital income than a small country. These compromising factors include: trade openness, excessive population density and its resultant falling per capita resources, underdeveloped domestic market and high domestic transaction costs, an economic structure that excessively relies on land and natural resources, and low technology levels.