What is the impact on the domestic market?
The impact on the domestic market was first hypothesized by Staffan Linder in 1961 and formulated by Paul Krugman in 1980. The central belief of the hypothesis is that in countries where some products are sold domestically, sales of the same product tend to increase overseas.
- Due to the influence of the domestic market, commodities with large economies of scale and high transportation costs tend to be produced and exported in countries with high domestic demand.
- Domestic market effects are part of the new trade theory and were developed as an explanation of evidence from world trade patterns that seem to contradict comparative advantage.
- The survey identifies the impact on the domestic market and the types of economic factors that affect it.
- Companies and investors need to consider the potential benefits of the impact of the domestic market when choosing where to place them.
Understand the impact of the domestic market
Domestic market effects are part of a new trade theory based on economies of scale and network effects, rather than the traditional trade model based on comparative advantage.
The impact of the domestic market shows that large countries tend to become net exporters of commodities with high transportation costs and strong economies of scale. In the presence of fixed costs (increasing production yields economies of scale), it makes sense to concentrate the production of goods in a single geographic location.
Moreover, if shipping costs are present, it makes sense to place the production in a location where the demand for goods is high. Demand for products tends to be high in rich and populous countries, and gross domestic product (GDP) is also high in these countries, resulting in large production bases as a result of the influence of the domestic market. Become.
Therefore, the domestic market effect explains the relationship between market size and exports, which cannot be explained by the comparative advantage trade model. It also helps explain why manufacturing activities tend to aggregate in certain places, even domestically.
- One of the implications of this model is that countries that consume large amounts of certain items often have trade surpluses in their industry (if economies of scale exist and transportation costs are high). ..
- Another implication is that developed countries, which are in high demand for high-quality products, tend to specialize in those products, resulting in increased trade with other developed countries.
- The third implication is that commodities with weak economies of scale and / or low transportation costs tend to be produced in smaller countries (low wages tend to offset other factors). ).
Much empirical research has been conducted on this topic and it has been found that there is generally evidence of impact on the domestic market. Prior to international trade based on comparative advantage and national capital and labor donations, based on evidence that some capital-rich countries, such as the United States, exported primarily labor-intensive products by the mid-20th century. Model was questioned. ..
The domestic market effect was initially developed as an explanation for this observation. After Krugman formulated the theory of domestic market effects, subsequent studies could test this explanation directly against actual data. These studies depend on the actual impact of the domestic market, the direction of crop yields (ie, whether scale crops increase, decrease, or are constant) and how high transportation costs are. We have found that the range of housing is emphasized or relaxed. Market impact is observed in certain countries or industries.
Impact on business and investment
The impact of the domestic market is not a high comparative advantage, but we predict that it will be possible to more efficiently produce economies of scale and high transportation costs in geographical locations with high regional demand. Companies need to take this into account when choosing the location of their production facility. The benefits of being close to a large local market can outweigh the other costs associated with that location. Investors should also keep this in mind when considering the current and planned future locations of the businesses they may invest in.