Market Potential and the Rise of Us Productivity Leadership

61 Pages Posted: 22 Feb 2013 Last revised: 4 Jun 2021

See all articles by Dan Liu

Dan Liu

Shanghai University of Finance and Economics

Christopher M. Meissner

University of California, Davis

Date Written: February 2013

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.

Suggested Citation

Liu, Dan and Meissner, Christopher M., Market Potential and the Rise of Us Productivity Leadership (February 2013). NBER Working Paper No. w18819, Available at SSRN: https://ssrn.com/abstract=2222506

Dan Liu

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Christopher M. Meissner

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

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