Market Size And Economic Growth

In recent years, there still exists a great controversy about the role of the extent of the market on economic growth. Many studies based on the assumption of perfect competition and constant returns to scale, lack the explanatory power of reality. The increasing returns to scale is an important motive of divergence of economic growth, and market size determines the extent of increasing returns. Therefore, we use the new economic geography approach to research the market size' impact on the economic growth, under the assumption of imperfect competition, increasing returns to scale, and transaction costs.This paper established a cross-border new economic geography model on the differences in GDP per capita, and found market size measured by Market Potential has the positive effect on GDP per capita in the imperfect competition, increasing returns to scale and the presence of transportation costs. That is, the larger country markets, the higher GDP per capita, and market size causes divergent national economic growth. After that, we selected the panel data in 108 countries and regions between 1960 and 2003, and made the static and dynamic regression on them and the OECD countries. Empirical results show that market size measured by market potential has a significant positive effect on its GDP per capita; once controlling the size of the market, various countries and regions have significant economic growth in the convergence trend; market potential has greater impact on GDP per capita in non-OECD countries. Finally, this paper puts forward policy recommendations, such as reducing local protectionism, increasing trade openness, improving infrastructure, reducing transaction costs etc. And ultimately these measures expand the market size, and thus increase GDP per capita and promote a country's economic growth.