The Home Market Effect and Bilateral Trade Patterns

Gordon H. Hanson, Chong Xiang

NBER Working Paper No. 9076
Issued in July 2002
NBER Program(s):   ITI

We test for home-market effects using a difference-in-difference gravity specification. The home-market effect is the tendency for large countries to be net exporters of goods with high transport costs and strong scale economies. It is predicted by models of trade based on increasing returns to scale but not by models of trade based on comparative advantage. In our estimation approach, we select pairs of exporting countries that belong to a common preferential trade area and examine their exports of goods with high transport costs and strong scale economies relative to their exports of goods with low transport costs and weak scale economies. We find that home-market effects exist and that the nature of these effects depends on industry transport costs. For industries with very high transport costs, it is national market size that determines national exports. For industries with moderately high transport costs, it is neighborhood market size that matters. In this case, national market size plus market size in nearby countries determine national exports.

download in pdf format
   (290 K)

email paper

This paper is available as PDF (290 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w9076

Published: Gordon H. Hanson & Chong Xiang, 2004. "The Home-Market Effect and Bilateral Trade Patterns," American Economic Review, American Economic Association, vol. 94(4), pages 1108-1129, September. citation courtesy of

Users who downloaded this paper also downloaded these:
Davis and Weinstein w5706 Does Economic Geography Matter for International Specialization?
Davis w6076 The Home Market, Trade, and Industrial Structure
Feenstra, Markusen, and Rose w6804 Undertstanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods
Corsetti, Martin, and Pesenti w11165 Productivity Spillovers, Terms of Trade and the "Home Market Effect"
Krugman w3275 Increasing Returns and Economic Geography
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us