The Home Market and the Pattern of Trade: Round Three

Does national market size matter for industrial structure? Round One (Krugman) answered in the affirmative: Home market effects matter. Round Two (Davis) refuted this, arguing that an assumption of convenience–transport costs only for the differentiated goods–conveniently obtained the result. In Round Three we relax another persistent assumption of convenience–two industry types differentiated only by the degree of scale economies–and find that market size reemerges as a relevant force in determining industrial structure. ∗Holmes, University of Minnesota and Federal Reserve Bank of Minneapolis ([email protected]). Stevens, Board of Governors of the Federal Reserve System ([email protected]). Holmes acknowledges support from the NSF through grant SES 9906087. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the National Science Foundation.