NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Income Distribution, Market Size, and Industrialization

Kevin M. Murphy, Andrei Shleifer, Robert Vishny

NBER Working Paper No. 2709
Issued in September 1988
NBER Program(s):   EFG

When world trade is not free and costless, a less developed country can profitably industrialize only if its domestic markets are large enough. In such a country, for increasing returns technologies to break even, sales must be high enough to cover the set-up costs, This paper studies some determinants of the size of the domestic market, and focuses on two conditions conducive to industrialization. First, agriculture or exports must provide the source of autonomous demand for manufactures. Such expansion of autonomous demand usually results from increases in farm productivity or from opening of new export markets. Second, income generated in agriculture or exports must be broadly enough distributed that it materializes as demand for mass-produced domestic goods, and not just for luxuries. We resort to these two determinants of the size of domestic markets to interpret several historical development episodes.

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Document Object Identifier (DOI): 10.3386/w2709

Published: "Income Distribution, Market Size and Industrialization" Quarterly Journal of Economics , August 1989.

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