Home-Market and Factor-Endowment Effects in a Gravity Approach

This paper shows how the home-market effect can be estimated in the generalized gravity equation of Bergstrand, taking into account traditional comparative advantage effects arising from differences in factor endowment. The empirical results suggest the presence of significant home-market effects for differentiated goods in many manufacturing industries which may be capital intensive or labour intensive. At the same time, our results suggest that home-market effects can only be detected for data disaggregated at the industry level and not for aggregated data. JEL no. F 12