Gravity, market potential and economic development

Abstract : This article provides evidence on the long-term impact of market potential on economic development. It derives from the New Economic Geography literature a structural estimation where the level of factors' income of a country is related to its proximity to large markets, referred to as 'market potential'. The empirical part evaluates this market potential for all countries in the world with available trade data over the 1965-2003 period and relates it to income per capita. Overall results show that market potential is a powerful driver of increases in income per capita.