DP11570 Market Potential and Global Growth over the Long Twentieth Century

Author(s): David S. Jacks, Dennis Novy
Publication Date: October 2016
Keyword(s): economic geography, market potential, structural gravity, trade costs
JEL(s): F1, N7
Programme Areas: International Trade and Regional Economics, Economic History
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11570

We examine the evolution of market potential over the long twentieth century from 1900 to 2010. Theoretically, we exploit a structural gravity model to derive a closed-form solution for a widely-used measure of market potential. We are, thus, able to express market potential as a function of directly observable and easily estimable variables. This allows us to consistently compare our measure of market potential both in the cross-section and over time. Empirically, we collect a large data set on aggregate and bilateral trade flows as well as output for 51 countries. We find that market potential exhibits an upward trend across all regions of the world, in particular after World War II. The rise in market potential is also associated with a significant share of global income growth over that period.