Numerical Analysis Of Home Market Effect And Related Problems

The home market effect(HME)is that when manufactured goods produced under increasing returns to scale(IRS),firms tend to concentrate in large countries to save transport costs,which finally makes the larger countries process a more-than-proportionate firm share and become a net exporter.This article is base on the model established by Krugman.We assumed that the world consists of several countries,and we consider both labor and capital as production factors.Countries can trade with each other with transport costs.Under above assumptions,we can get both the HME in terms of firm share and the HME in terms of wage by numerical analysis.In addition,we also make some welfare analysis and show that the welfare in large country is higher than that in smaller one,also both countries can gain from trade.