Working Paper: NBER ID: w18819
Authors: Dan Liu; Christopher M. Meissner
Abstract: The US advantage in per capita output, apparent from the late 19th century, is frequently attributed to its relatively large domestic market. We construct market potential measures for the US and 26 other countries between 1880 and 1913 based on a general equilibrium model of production and trade. When compared to other leading economies in 1900, the year around which the US overtakes Britain in productivity leadership, the US does not have the overwhelming lead in market potential that it has in GDP per capita. Still, market potential is positively related to the cross-country distribution of income per capita, but the impact of market potential is likely to be very heterogeneous. We illustrate this in a quantitative calculation of the welfare gains from removing international borders in 1900 within a parsimonious general equilibrium trade model. While there are gains from trade for all nations, the largest European countries do not close their per capita income gaps with the US after this hypothetical rise in market potential. On the other hand, many small countries could have done so.
Keywords: No keywords provided
JEL Codes: F12; F15; N10; N21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| removing international borders (F55) | welfare gains (D69) |
| market potential (L17) | welfare gains (D69) |
| size and integration of the economy (F02) | impact of market potential (F61) |
| market potential (L17) | income per capita (D31) |