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.

  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. Protectionism

    Government actions and policies that restrict or restrain international ...
  6. Export

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