Journal of International Economics

Nama : Anisa Rizky Amalia

Kelas : 2EA06

NPM : 10211925

Journal of International Economics

Market size, division of labor, and firm productivity

 

Abstract

We generalize Krugman's (1979) ‘new trade’ model by allowing for an explicit production chain in which a range of tasks is performed sequentially by a number of specialized teams. We demonstrate that an increase in market size induces a deeper division of labor among these teams which leads to an increase in firm productivity. The paper can be thought of as a formalization of Smith's (1776) famous theorem that the division of labor is limited by the extent of the market. It also sheds light on how market size differences can limit the scope for international technology transfers.

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Highlights

► We generalize the Krugman (1979) model by introducing specialized production teams. ► We demonstrate that an increase in market size induces a deeper division of labor. ► This shows that the division of labor can be limited by the extent of the market. ► It also implies that market size differences can limit global technology transfers.

JEL classification

• F10;
• F12;
• L22;
• L25

Keywords

• Market size;
• Division of labor;
• Firm productivity;
• Technology transfer

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We are grateful to Pol Antras, Holger Breinlich, Alejandro Cunat, Elhanan Helpman, Gianmarco Ottaviano, Henry Overman, Stephen Redding, and Tony Venables. We also thank the editor, Robert W. Staiger, and two anonymous referees, for their thoughtful comments. All remaining errors are ours. This work extends the second chapter of Ossa's Ph.D. dissertation originally entitled “Trade Liberalization, Outsourcing, and Firm Productivity.