In many less developed countries, industrialization begins when a leading sector such as agriculture or commodity exports generates income that enlarges domestic markets for manufactured goods. As domestic markets grow, industries that could not break even in smaller markets become profitable. One of the critical determinants of market size that can affect the success of industrialization is the distribution of income. If profits from an export or agricultural boom are too unequally distributed, they will be spent on domestic or imported luxuries, rather than on domestic, industrialized goods. The effect of income distribution on market size can help explain the success and failure of industrialization in several historical episodes. It can also shed light on the effects of industrialization on the distribution of income and export promotion. The purpose of this project is to explore theoretically the determinants of market size for manufacturing goods in an under developed country and to relate market size to the extent of industrialization. Of particular interest is the effects of the composition of consumer demand on the possibility of viable industrialization. Attention will also be paid to the question of whether industrialization, itself, can generate enough income and, therefore, demand for industrial goods so that manufacturing firms can enjoy increasing returns to scale and enhanced profitability.
