The effect of economic geography on income per capita

Thierry Mayer, Mon, 04/21/2008



Finding explanations for cross-country differences in development levels is perhaps one of the most important questions in economics. CEPR DP6798 provides evidence that access to markets, measured as a theory-based index of market potential is an important factor in development. The paper derives from the New Economic Geography literature - a structural estimation where the levels of factors’ income of a country are related to its export capacity.

In general, the theoretical and empirical findings of Redding and Venables (2004) in many directions are confirmed as there is robust evidence that the economic geography of countries matters greatly in their income per capita trajectory. The results in 2003 illustrate that bringing the market potential of the Congo Democratic Republic to the one of Thailand is predicted to increase its GDP per capita by a factor of around 24. In addition, the average growth of the market potential due to neighbour countries between 1993 and 2003 in the sample is estimated to have raised income per capita by around 105%.

DP6798 Market Potential and Development

Summarised by CEPR staff


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Topics:  Development International trade

Tags:  development, international trade, Gravity, Market Potential


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