Market Potential and the Rise of US Productivity Leadership
The US advantage in per capita output, apparent from the late 19th century, is frequently attributed to its relatively large domestic market. We construct market potential measures for the US and 26 other countries between 1880 and 1913 based on a general equilibrium model of production and trade. When compared to other leading economies in 1900, the year around which the US overtakes Britain in productivity leadership, the US does not have the overwhelming lead in market potential that it has in GDP per capita. Still, market potential is positively related to the cross-country distribution of income per capita, but the impact of market potential is likely to be very heterogeneous. We illustrate this in a quantitative calculation of the welfare gains from removing international borders in 1900 within a parsimonious general equilibrium trade model. While there are gains from trade for all nations, the largest European countries do not close their per capita income gaps with the US after this hypothetical rise in market potential. On the other hand, many small countries could have done so.
We are grateful to Steve Broadberry, Giovanni Federico, David Greasley, Michael Huberman, David Jacks, Ian Keay, Alex Klein, Aldo Musacchio, and Dennis Novy, who supplied advice on data, gave us the green light to use some of it, and warned us against potential mis-use of various data series. Special thanks to Pierre van der Eng who graciously provided access and advice on Indonesian trade and GDP data. Lionel Fontagné, Peter Jensen, Thierry Mayer, Dennis Novy, Max Schulze, Paul Sharp, and Jose de Sousa gave us many helpful comments and suggestions. We also thank conference and seminar participants at the NBER Summer Institute, Berkeley, Madrid, Odense, Essex, Paris, and Bologna for comments and suggestions. Remaining errors are the responsibility of the authors. Neither of the co-authors had any significant outside financial relationships nor was this research externally funded. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Journal of International Economics Volume 96, Issue 1, May 2015, Pages 72–87 Cover image Market potential and the rise of US productivity leadership Dan Liua, b, , Christopher M. Meissnerc, d, , citation courtesy of