Market potential and the rise of US productivity leadership

Abstract

a b s t r a c t Available online xxxx JEL classification: F15 F43 F62 N1 N70 Keywords: Market potential Border effect Gravity Gains from trade ConvergenceToday's globalization, driven by lower barriers to trade, has increased market potential for many nations and led to gains in GDP per capita. We test whether this was true in the first wave of globalization by constructing market potential measures for a sample of 27 countries in 1900 and 1910 based on a general equilibrium model of production and trade. Cross-sectional estimates suggest that market potential was an economically significant determinant of GDP per capita at this time. To assess welfare effects, we then study the general equilibrium impact of raising market potential by eliminating international borders in a quantitative counterfactual calculation for 1900. There are significant gains in real income per capita for all nations. We use US per capita output as a benchmark, since it attained leadership in this variable from the late 19th century and the literature frequently attributes this to its relatively large domestic market -a market unconstrained by trade costs associated with international borders. Because market potential was already near that of the US, the largest European countries do not entirely close their per capita income gaps with the US after removing all border barriers to trade within Europe or even globally. On the other hand, many small European countries could have done so.

Productivity Trends in Advanced Countries between 1890 and 2012

“…The origin of the U.S. productivity lead has been traced back to a sizeable internal market (in particular, Romer, 1996). However, when comparing the impact of long internal distances in the United States with the impact of borders in Europe, market potential can only partly explain the U.S. leadership (Liu and Meissner, 2013). A greater emphasis is now placed on the more efficient exploitation of natural resources endowment in the United States, as cheap resources and resource-using machinery were substituted for scarce skilled labor (Ames and Rosenberg, 1968;Nelson and Wright, 1992).…”

Firm R&D, Processing Trade and Input Trade Liberalisation: Evidence from Chinese Firms

“…Finally, to rule out the possibility that non‐pure processing firms have more R&D investment after the WTO accession because of other driving forces, such as output trade liberalisation and larger foreign market size, the estimates in columns (4) and (5) control for several other variables, as mentioned above. In particular, estimates in column (5) include importing countries' GDP weighted by their bilateral trade volume as an additional variable to capture the increase in access to foreign markets due to the trade liberalisation imposed by China's trading partners (Liu and Meissner, ). And it still yields results very close to those in column (3).…”

Democracy in the neighborhood and foreign direct investment

“…It is a long‐established finding that countries with higher market access (MA) and/or market potential (MP), which is measured by the closeness of a country to other high‐income countries, tend to have a higher income (see, for example, Crafts & Venables, 2003; Redding & Venables, 2004; Liu & Meissner, 2015), with access to the export market found to be one of the main factors behind this relationship (see Bosker & Garretsen, 2012; de Sousa, Mayer, & Zignago, 2012). Even though the above papers examined the relationship between MA and economic development of a country, recent studies also examined the link between FDI and MA.…”