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Should Small Countries Fear Deindustrialization?
Author(s) -
Goh AiTing,
Michalski Tomasz Kamil
Publication year - 2010
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2010.00899.x
Subject(s) - deindustrialization , economics , homogeneous , international economics , production (economics) , international trade , goods and services , macroeconomics , economy , physics , thermodynamics
Will small countries deindustrialize when opening up to trade with large countries? Donald Davis (1998) shows that for the home market effect to lead to deindustrialization of small countries, trade costs for homogeneous goods must be sufficiently smaller than trade costs in differentiated goods, a condition which is not supported by empirical evidence. We show that if differentiated goods production uses tradable inputs small countries can become deindustrialized when trading with a sufficiently large country and if trade costs are low.