Citation

Discussion Paper Details

Please find the details for DP2035 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Understanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods

Author(s): Robert Feenstra, James R. Markusen and Andrew K Rose

Publication Date: December 1998

Keyword(s): Cournot-Nash, Empirical, homogeneous, reciprocal dumping, Simulation and theoretical

Programme Area(s): International Macroeconomics and International Trade and Regional Economics

Abstract: This paper argues that the theoretical foundations for the gravity equation are general, while the empirical performance of the gravity equation is specific to the type of goods examined. Most existing theory for the gravity equation depends on the assumption of differentiated goods. We show that the gravity equation can also be derived from a 'reciprocal dumping' model of trade in homogeneous goods. The different theories have different testable implications. Theoretically, the gravity equation should have a lower domestic income elasticity for exports of homogeneous goods than of differentiated goods because of a 'home market' effect that depends on barriers to entry. We quantify the home market effect empirically using cross-sectional gravity equations and find that domestic income export elasticities are indeed substantially higher for differentiated goods than for homogeneous goods.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2035

Bibliographic Reference

Feenstra, R, Markusen, J and Rose, A. 1998. 'Understanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2035