NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Shrinking Advantage of Market Potential

Marius Brülhart, Klaus Desmet, Gian-Paolo Klinke

NBER Working Paper No. 26526
Issued in December 2019
NBER Program(s):Development Economics, Economic Fluctuations and Growth, International Trade and Investment

How does a country's economic geography evolve along the development path? This paper documents recent employment growth in 18,961 regions in eight of the world's main economies. Overall, market potential is losing importance, and local density is gaining importance, as correlates of local growth. In mature economies, growth is strongest in low-market-potential areas. In emerging economies, the opposite is true, though the association with market potential is also weakening there. Structural transformation away from agriculture can account for some of the observed changes. The part left unexplained by structural transformation is consistent with a standard economic geography model that yields a bell-shaped relation between trade costs and the growth of centrally located regions.

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Document Object Identifier (DOI): 10.3386/w26526

 
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