It trades agricultural products against manufactures from the core, and we are back in a world of comparative advantage! In all NEG models, transport costs play an essential role for the dynamics of geographical change, as they are a key determinant of the relative strength of centrifugal and centripetal forces.
The basic forces are the price-index effect on the one hand, and the pecuniary externalities in the form of backward and forward linkages on the other see also Neary, , In the case of relatively low transport costs, the arrival of a new firm in region 1 which has moved from region 2 triggers a fall in the price index. This happens because of the concomitant decrease in transport costs, but also due to lower proportional demand for all firms in region 1. Moreover, the firms face a rise in nominal wage costs as they compete for workers.
All this increases, however, the real wage in the region and induces the immigration of workers from region 2, leading to a countervailing effect in terms of increased demand, also described as backward linkage. Immigration stops only when the real wage rate is equalized between the regions. This implies a fall in the nominal wage in region 1 , as transport costs and the price index are now lower than in region 2.
The ensuing fall in the average and marginal costs in region 1 creates a forward linkage and works in favour of agglomeration. For this, it is necessary to assess the benefits and costs of the style of analysis propagated by Krugman. Before we return to space, we have to take a closer look at that style.
He ended the lectures on the following programmatic note:.
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I do not come here, however, to fight against the sociology of my profession, but to exploit it: by demonstrating that models of economic geography can be cute and fun, I hope to attract other people into tilling this nearly virgin soil. Krugman has a great talent of cutting right to the chase of the matter, in witty prose, often with self- irony. Yet, his version of the MIT programme is more comprehensive, essentially characterized by two overlapping sets of prescriptions.
Listen to the Gentiles; 2. In other words, those who employ new analytical tools should adapt the objects of research accordingly, instead of sticking to the research questions handled with the old standard toolbox. What assumption is justifiably silly and what just silly, depends on the usefulness of the models for explaining and predicting real phenomena. For this the assumptions need neither be realistic nor conventionally accepted. The Dixit-Stiglitz model is an obvious deviation. You do not have to believe that this is a literal description of the economy—I certainly do not—to recognize that it is an approach that has shown a lot of power to make sense of the world, and my goal was to exploit that power, not challenge it.
Rather, it represents a reworking of regional science and urban economics models, precisely the sort of approaches that geographers discarded years ago. Martin, , In a crude sense, mainstream economics is not going away: like it or not, the White House has a council of Economic Advisers, not a Council of Geographical Advisers, the World Bank hires lots of economists and not many geographers, and so on. So if insights from geography are going to have the influence they should, there has to be some kind of rapprochement.
Krugman, b, 2. However, there is a fundamental difference in the treatment of space. First, agglomeration is caused not by considerations to locate close to the market alone; it is also influenced by increasing returns to scale. Second, the location of the agglomeration is determined endogenously. Depending on the level of transport costs, stability of the spatial structure can become an issue.
The typical thought experiment is that of falling transport costs, which makes the system move from a stable symmetric equilibrium toward agglomeration in either of the two regions. The core model uses the Dixit-Stiglitz approach, which has become conventional in industrial economics, trade theory, growth theory and monetary macroeconomics, in order to produce dynamics of cumulative and circular causation with multiple equilibria. In terms of reducing real-world complexity to few essential variables and economic relations, the NEG core model corresponds to the requirement of a minimalist framework.
In a very large literature, it has thus achieved the status of a general theory of the spatial economy. Krugman himself points out repeatedly that new models do not only have benefits, they also have a cost. They always come with blind spots; the challenge is to do away with them by extending the scope or changing the shape of the models. This is how Krugman generally describes his own approach to the exploration of intrasectoral trade and regional divergence, which previously had been restricted by the conventional assumption of constant returns to scale.
Yet, the NEG core model too has its blind spots in focal areas. This deemphasizes, among other things, the implications of increasing returns to scale, as there is no barrier to market entry and no strategic behaviour. In the context of dealing with a spatial economy the following are most prominent:. The distance between the assumptions and the conclusions derived from the NEG core model is thus considerably shortened, contrary to rule c. But the tricks should be permissible only for the innovations, i.
The follower models should try to do without them, one by one. To some extent, they have done so: positive transport costs for agricultural goods have been integrated Picard and Zeng, ; and the migration equation has been extended to include explicit optimization of forward-looking agents Baldwin et al. In dealing with space, the iceberg metaphor for transport costs is unsatisfactory.
The iceberg trick looks ingenious because it defines transport costs without the complications of an explicit treatment of the transport sector. This is permissible, if transport costs are used only as a parameter for first-hand examinations of stability and other properties of the basic structure.
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However, it implies that the price of shipping one unit of manufactures to the other region is the same in both regions, even if and when nearly all industry has moved to one region. The properties of the Krugman iceberg model […] imply that the delivered prices of goods increase exponentially with the distance shipped. On the other hand, all of the available evidence suggests that delivered prices tend to be concave rather than convex with distance.
As such, the treatment of geography and space in these types of new economic geography models is very particular, and is based on assumptions which would be regarded as untenable in most other spatial models. McCann, , The first is a problem of dealing with more than two regions, the second relates to feedbacks from trade and agglomeration to transport costs and trade costs in a wider sense. As space is more than a line between two discrete points, and the question is whether the results from the two-region case also hold for many regions. In that economy all regions are lined up like pearls on a string, sequentially located around the circumference of a circle with equal distances between adjacent regions.
Numerical analysis by simulation helps to identify the number and location of agglomerations in the n- region setting. The assumption may help to preserve the neutrality of space and to yield insights about the number and positions of agglomerations. But it sets a symmetry restriction that ignores potential feedbacks from economies of scale on trade costs which may emerge once equidistance is abandoned. It cannot be excluded that there is a two-way relationship between the spatial distribution of economic activity and trade costs.
The latter should not just be treated as an exogenous parameter for location decisions; they are most likely to have components that vary endogenously with the size and direction of the manufactures exports. It is essentially a trade-to-production ratio that indicates the trade intensity between two regions.
Its name is derived from the usual specification:. Trade flows within the region, such as z ii, indicate domestic absorption. While the phi-ness of trade may be a useful method to indicate economic integration, it is less useful for the integration of trade costs into the NEG framework. An empirical problem, related to extending the two-region framework of the NEG to multi-region settings, is that the phi-ness indicator will take low values near autarky for trade with and among small regions in a big world, even if trade costs are low.
There is no significant and stable correlation of phi-ness with trade costs. Trade costs are derived from trade flows and then inserted into the model in order to determine exactly those trade flows. This could reasonably be done in recursive models with time lags, but we know of no phi-ness-based NEG models that have these properties. One example is Duranton and Storper , who show under which conditions a decline in transport costs could lead to a rise in trade costs. However, their framework differs from the standard NEG analysis in that product differentiation is not the base but a possible outcome of the model in terms of different levels of quality.
Furthermore, transport costs remain exogenous. A different approach is chosen by Gruber and Marattin They introduce taxation into a standard NEG model. This makes funds available for investment in infrastructure, which lowers transport costs. These become endogenous to political decisions about the spending of tax revenues, but they are not derived from maximizing behaviour of private agents. Lang introduces heterogenous transport costs for manufactures to a linear footloose entrepreneur model and describes a regional sorting of firms by transport costs.
Again, transport costs are exogenously given and not microfounded. If or when such models can be extended to include other relevant trade costs, and if they succeed in merging with further models that consider endogenous changes in congestion costs, trade costs for agricultural goods etc. Prior to Isard, Ohlin , vii described his Interregional and International Trade as an endeavour to contribute toward solving the following problems:.
In this field collaboration between economists and economic geographers is urgently needed. The fact that the latter have received so little help and stimulus from the former seems chiefly due to the scanty attention economic theory has given to localization problems.
Ohlin, , vii. It provides a general-equilibrium analysis of trade, space aspects are taken into account, and movements of factors of production are considered, particularly in their relation to goods trade. Finally, mainstream economic theory gives fuller attention to localization problems, and NTT, NNTT and NEG have become acronyms for top-growth areas in terms of research efforts and literature output. With a view to the rigidities of the current structure of the NEG core model, the question is whether it can be done.
We have benefitted from comments of numerous participants on these occasions and from comments of two anonymous referees. New York: McGraw-Hill. Baldwin, Richard et al. Economic Geography and Public Policy.
Princeton: Princeton University Press. Trade and Growth with Heterogeneous Firms. Journal of International Economics , 74 1 : Journal of Urban Economics , 65 2 : Papers in Regional Science , 88 2 : Journal of Economic Geography , 11 2 : Brakman, Steven and Harry Garretsen. Munich: CESifo. The New Introduction to Geographical Economics 2nd ed. Cambridge: Cambridge University Press. An Account of Global Intra-industry Trade, The World Economy , 32 3 : Burenstam Linder, Staffan. An Essay on Trade and Transformation. Baltic Journal of Economics , 10 1 : Dixit, Avinash and Joseph Stiglitz.
Monopolistic Competition and Optimum Product Diversity. American Economic Review , 67 3 : Duranton, Gilles and Michael Storper. Rising Trade Costs? Agglomeration and Trade with Rising Transport Costs. Canadian Journal of Economics , 41 1 : Ehnts, Dirk. Norderstedt: Books on Demand GmbH.
Paul Samuelson. Fujita, Masahisa. Annals of Regional Science , 33 4 : Fujita, Masahisa and Paul Krugman. Papers in Regional Science , 83 1 : The Spatial Economy. Cities, Regions, and International Trade.
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Regional economic geography looks at the economies of specific regions around the world. These geographers look at local development as well as the relationships that specific regions have with other areas. Historical economic geographers look at the historical development of an area to understand their economies. Behavioral economic geographers focus on an area's people and their decisions to study the economy. Critical economic geography is the final topic of study.
It developed out of critical geography and geographers in this field attempt to study economic geography without using the traditional methods listed above. For example, critical economic geographers often look at economic inequalities and the dominance of one region over another and how that dominance impacts the development of economies.
In addition to studying these different topics, economic geographers also often study very specific themes related to the economy. These themes include the geography of agriculture , transportation , natural resources, and trade as well as topics such as business geography. Journal of Economic Geography. Each of these articles is interesting because they are very different from one another but they all focus on some aspect of the world's economy and how it works. Share Flipboard Email. Master's specialisation Economic Geography: something for you?
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