DP12352 Geographical Advantage: Home Market Effect in a Multi-Region World

Author(s): Kiminori Matsuyama
Publication Date: October 2017
Keyword(s): A Multi-region Model of Costly Trade in Differentiated Goods, Convergence versus Divergence, Geographical Advantages and Disadvantages, Home Market Effect, monopolistic competition, Proximity Matrix, Regional Economic Integration, Trade Routes, Uneven Development
JEL(s): F12, F15, O11, R12
Programme Areas: International Trade and Regional Economics, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12352

This paper proposes a theoretical framework, which allows us to study the effects of geographical factors on the distribution of industries across many regions. The geographical feature of each region is summarized by a proximity matrix, whose elements measure the closeness between every pair of regions and depend on the parameters representing the transport and other costs of using a variety of trade routes. A change in these costs of trade affects the distribution of industries by amplifying the geographical advantages and disadvantages of regions. Through a series of examples, we demonstrate how this framework can be used not only to examine the effects of an improvement in transport infrastructure, but also to address some problems from economic history, regional economic integration, and the north-south division, and discuss some geopolitical issues.