Technology Advantage and Trade: Home Market Effects Revisited

Deng-Shing Huang (), Yo-Yi Huang and Cheng-Te Lee
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Deng-Shing Huang: Institute of Economics, Academia Sinica, Taipei, Taiwan, https://www.econ.sinica.edu.tw/
Yo-Yi Huang: Institute of Applied Economics, National Taiwan Ocean University, Taiwan
Cheng-Te Lee: Department of International Trade, Chinese Culture University, Taiwan

No 06-A011, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: According to conventional home market effects, free trade tends to shrink the market share for the smaller economy in the differentiated manufacturing goods, and in the extreme, leads to a complete hollowing out of the industry. In departing from the original Helpman-Krugman modeling assumptions behind the home market effects, we introduce technology differences between trading partners and prove that the home market effects will be offset and will even reverse if the small economy has better technology than the other country. We also prove that even with identical country size, the intra-industry trade addressed in the existing literature may not occur; it will occur only if the technology differential lies within a certain range that is positively affected by the level of transport cost.

Keywords: Home market Effects; Country Size; Technology Differential (search for similar items in EconPapers)
JEL-codes: F12 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-10
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