Core-Periphery vs. Home Market Effect: Trade in the Traditional Sector and the Demand Advantage

Abstract

We study the role of (i) initial dierences in shares of immobile workers between countries, which stand for agglomeration forces, and (ii) positive trade costs in the traditional sector which are related to dispersion forces, in shaping the spatial pattern of the developed and transition countries. We show that on the trade liberalization path in skill-intensive industries, keeping high trade barriers in less skill-intensive sectors is enough to protect a transition country from de-industrialization. If trade liberalization in a skill-intensive sector is accompanied by decreasing trade barriers in the traditional sector, the developed country has a higher probability to become a Core. When partial agglomeration is stable, it is characterized by the Home Market Eect (HME).