Home Market Effect

DEFINITION of 'Home Market Effect'

The notion that, when it is fiscally prudent, a company or industry will often base itself in the country where the majority of its goods are consumed in order to minimize shipping costs. The Home Market Effect suggests that there is a link between market size and exports that is not accounted for by other international trade models based strictly on comparative advantage. The Home Market Effect is part of a broader set of "New Trade Theory" models that seek to explain why and how international trade takes place.

BREAKING DOWN 'Home Market Effect'

The Home Market Effect was primarily developed by Paul Krugman, a Nobel Prize-winning economist and Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, as an alternative to the Linder hypothesis. The Home Market Effect and other New Trade Theory models help to explain why more populated regions often host a disproportionate share of producers. The Home Market Effect refutes Staffan Burenstam Linder's claim that differences in countries' preferences hinder trade.

RELATED TERMS
  1. Absolute Advantage

    The ability of a country, individual, company or region to produce ...
  2. Paul Krugman

    Paul Krugman is an economist and writer from the United States, ...
  3. World Trade Organization - WTO

    An international organization dealing with the global rules of ...
  4. Economics

    A social science that studies how individuals, governments, firms ...
  5. Export

    A function of international trade whereby goods produced in one ...
  6. Protectionism

    Government actions and policies that restrict or restrain international ...
Related Articles
  1. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  2. Forex

    The Consumer Price Index

    Find out how this economic measure can help you make key financial decisions.
  3. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  4. Economics

    How Interest Rates Affect The U.S. Markets

    When indicators rise more than 3% a year, the Fed raises the federal funds rate to keep inflation under control.
  5. Investing News

    Global Headwinds Hit the 6 Biggest Economies

    As of Friday, initial estimates for fourth-quarter and full-year 2015 growth in gross domestic product (GDP) are available for five of the world's six largest national economies, and for the ...
  6. Economics

    Three Reasons 2016 Could Be A Better Year for the Global Economy

    The diminishing commodities market and China's slowing growth hurt a lot of companies and economies worldwide. However, there is a chance that much of the shaking out has already occurred.
  7. Fundamental Analysis

    South Korea - King of Exports

    Read about one the most important and successful exporting countries in the world, and learn more about the types of products it exports.
  8. Economics

    The Ripple Effect: Interest Rates and the Stock Market

    Investors should observe the Federal Reserve’s funds rate, which is the cost banks pay to borrow from Federal Reserve banks.
  9. Economics

    3 Things That May Happen at FOMC Meeting

    We are keeping a close eye on what the Fed will say about economic outcomes and participants’ viewpoints at the FOMC meeting this week.
  10. Investing Basics

    Why You Need More International Stocks

    Most investors never stray beyond their borders. That’s a shame.
RELATED FAQS
  1. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
  2. How does the Wall Street Journal prime rate forecast work?

    The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >>
  3. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  4. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  5. Marginal propensity to Consume (MPC) Vs. Save (MPS)

    Historically, because people in the United States have shown a higher propensity to consume, this is likely the more important ... Read Full Answer >>
  6. When do I need a letter of credit?

    A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a financial institution, ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center