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Spatial Economics and Nonmanufacturing Sectors
Abstract
One of the unsatisfactory aspects of spatial economics is the role ascribed to the agricultural sector. To study how economic activities are impacted by the falling trade costs of manufactured goods, it is convenient to assume that the agricultural sector has only one homogeneous product and that it is traded costlessly. This paper reports how these oversimplified assumptions can be improved and what new results are derived regarding the nonmanufacturing sectors. In particular, we survey how to apply this general-equilibrium approach to clarify the role of trade costs in disclosing some well-known puzzles, including the resource curse, Dutch disease, and transfer paradox.
We extend the core-periphery model with differentiated agriculture with transport cost to those on discrete and continuous multi-regional space and investigate the stability of homogeneous stationary solution, especially for the model on a continuous periodic space. Unstable eigenfunctions can be stable when manufacturing transport cost is sufficiently high, but become unstable when the cost is lower than a certain critical point. As the transport cost decreases further below another critical point, the eigenfunction becomes stable again. It can be observed numerically that the unstable area, which is the range of the transport cost between those two critical points, generally tends to expand with the frequency increases limited to even or odd numbers only.
This paper examines how matching elasticity and labor bargaining power affect industrial agglomeration in an open economy with frictional labor markets. The analysis is based on a footloose capital model of two symmetric regions with a single industry and immobile labor. Unemployment is generated by a Diamond–Mortensen–Pissarides-type search and matching mechanism. We find that the agglomeration force caused by search frictions in the labor market may be strong enough to break the symmetric equilibrium when the matching elasticity with respect to job vacancies is large and/or labor bargaining power is strong. Matching elasticity is crucial for determining the configuration of economic geography.
This paper presents a general equilibrium model of new economic geography, incorporating brand agriculture that produces differentiated agricultural products. Focusing on the core‐periphery space, we show that highly differentiated brand agriculture can be sustained in the periphery even when access to the core market is not particularly good. This result supports the promotion of innovative products in rural areas in order to avoid direct price competition in generic commodities markets under unfavorable conditions.
The purpose of this paper is to extend Uzawa’s two-sector model of a national
economy to an economy with any number of regions and interregional tourism.
The paper studies interregional economic development with interactions
between wealth accumulation, economic structure, interregional trade and
tourism under assumptions of profit maximization, utility maximization, and
perfect competition. The model is unique in interregional neoclassical growth
theory in that it introduces endogenous tourism within a general equilibrium
framework. The model is built on microeconomic foundations. It not only
extends the well-known Solow growth model and the Uzawa two-sector model to a
national economy with any number of heterogeneous regional economies, but
also introduces tourist flows between regions. We demonstrate that the
movement of the J-regional economy can be described by J+1 differential
equations. We simulate the movement of a national economy with three regions.
We show that the dynamic system has a unique equilibrium. We carry out
comparative dynamic analysis with regard to the propensity to tour a region,
the cost of travel from one region to another, the total factor productivity
of a region’s industrial sector, the total factor productivity of a region’s
service sector, the propensity to save, the parameters of a region’s amenity,
the propensity to consume housing, and the national population. We
demonstrate the dynamic effects of these changes on national GDP, wealth, and
tourist patterns.
This paper empirically examines the impact of tourism on the longrun economic growth of Greece by using causality analysis of real gross domestic product, real effective exchange rate and international tourism earnings. A Multivariate Auto Regressive (VAR) model is applied for the period 1960:I-2000:IV. The results of co-integration analysis suggest that there is one co-integrated vector among real gross domestic product, real effective exchange rate and international tourism earnings. Granger causality tests based on Error Correction Models (ECMs), have indicated that there is a 'strong Granger causal' relationship between international tourism earnings and economic growth, a 'strong causal' relationship between real exchange rate and economic growth, and simply 'causal' relationships between economic growth and international tourism earnings and between real exchange rate and international tourism earnings.
We study the effects of a decrease in trade costs on the spatial distribution of industry in a multi-regional economy, when a rise in the regional population of workers generates higher urban costs. When the number of cities is unaffected by falling trade costs, small cities become smaller for large trade costs, medium-sized cities become smaller for medium values of trade costs, and large cities become smaller for small trade costs. Furthermore, when urban costs are 'identical,' we show that there exists a path of stable equilibria such that the industry, first, experiences progressive agglomeration into a decreasing number of cities and, then, dispersion into a growing number of cities. The second phase arises because of the increasing urban costs associated with the process of agglomeration.
This paper examines the impact of public infrastructure on industrial location when increasing returns are present. Trade integration implies that firms tend to locate in countries with better domestic infrastructure. High levels of international infrastructure and strong returns to scale magnify industrial relocation due to differentials in domestic infrastructure or capital endowments. Regional policies which finance domestic infrastructure in a poor country lead firms to relocate in this country. Regional policies which finance international infrastructure in a poor country will lead firms to leave this country. We also analyze the incentives for countries to inhibit industrial relocation.
This paper aims at pulling everything related to 'agriculture' or the 'periphery' a little more into the focus of research. We try to achieve this through surveying the existing theoretical and empirical literature in the field of NEG (New Economic Geography) in order to elaborate its linkages to immobile factors such as land, land-intensive productive activities, agriculture, rural areas, and the periphery. The main features of the broad variety of NEG models are reviewed with a special focus on the theme of agglomeration, which turns out to be vital for rural areas. All of these contributions are then commented on, with the aim of suggesting and discussing some future lines of research in the field.
This paper examines the impact of public infrastructure on industrial location when increasing returns are present. Trade integration implies that firms tend to locate in countries with better domestic infrastructure. High levels of international infrastructure and strong returns to scale magnify industrial relocation due to differentials in domestic infrastructure or capital endowments. Regional policies which finance domestic infrastructure in a poor country lead firms to relocate in this country. Regional policies which finance international infrastructure in a poor country will lead firms to leave this country. We also analyze the incentives for countries to inhibit industrial relocation.
This paper examines the tax competition for mobile capital between two symmetric countries in a monopolistic competition economy. Taxation generates its own distortions of location and consumption as long as consumers/governments deviate from the symmetric equilibrium. Taking all possible distortions into account, this paper finds that the equilibrium tax rate may be positive and increasing when trade costs are high while it is negative and decreasing when trade costs are low if consumers have additively separable preferences displaying an increasing relative love for variety. This non‐monotonic relationship of tax rate with trade costs is further accompanied by welfare loss when market integration starts. The pro‐competitive effect and the income effect are both crucial to deriving the results.
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Equilibria and optima generally differ in imperfectly competitive markets. Although this is well understood theoretically, it is unclear how large the welfare distortions are in the aggregate economy. Do they matter quantitatively? To answer this question, we develop a multisector monopolistic competition model with endogenous firm entry and selection, productivity, and markups. Using French and UK data, we quantify the gap between the equilibrium and optimal allocations. We find that inefficiencies in the labor allocation and entry between sectors, as well as inefficient selection and output per firm within sectors, generate welfare losses of about 6%–10% of GDP.
For urban areas, Tourism Carrying Capacity (TCC) can be defined as the abilities of a destination to absorb and manage increasing tourism activities without a degradation in the tourism sector of the urban economy. To optimize the concept and assessment of TCC, this paper develops a dynamic carrying capacity model including three subsystems and 47 variables by System Dynamic (SD) method from a macroscopic perspective. Taking the top nine urban tourism destinations in China as the objects of the study, we compare how government investments in tourism resource, environmental protection, economy and infrastructure impact tourism growth through four scenarios. The results indicate that environment scenario simulation contributes to both TCC and tourism economic growth; the economic scenario simulation can increase the overall TCC, but harms to tourism economic growth compared with other scenarios; the resource scenario simulation has no significant change in TCC compared with the current scenario. The results suggest that to promote sustainable tourism development, TCC management should focus on environmental and tourists management policies, such as external environment improvement, behaviour rules and ecological concept establishment in personal daily life.
This paper explores the conditions for the emergence of a system of cities in a general equilibrium setting that accounts for the mobility of labor, transportation costs between cities and commuting costs within cities. Locations are equally distributed over a circular space. We find that the multiplicity of stable spatial equilibria is the rule and not the exception. Using the concept of stability areas to study the transition from one stable equilibrium to the next, we show that decreasing commuting or transportation costs generate equilibrium paths that may feature a megalopolis or hierarchical system of cities having different sizes. We confirm that transportation and commuting costs have opposite impacts on the space-economy.
This paper studies the effect of income transfers on the distribution of economic activity through a modified FE model. The model incorporates some key features of the Dutch disease literature: sectorial mobility and non-tradable goods. If foreign competition is high (high trade openness), transfers could cause a Dutch disease in the short and long runs. For intermediate levels of foreign competition, Dutch disease appears only in the short run. And, for low levels, the recipient region always benefits from the income transfers. Additionally, when economies of scale are large, the transfers could perpetuate a core–periphery structure.
Worldwide materials extraction increased by a factor of 8.4 over the course of the 20th century. In the meantime, global GDP and population increased by factors of about 22 and 4, respectively. This reveals that one of the key factors driving the increase in the exploitation of the resources was the growth in world population, although mitigated by the reduction in the intensity in the use of the resources in production. In this paper, we present a model that combines the theory of endogenous growth and the economy of natural resources, but taking into account the geographical distribution of economic activity. Indeed, the New Economic Geography provides insights about two elements that, although speeding up GDP growth, can curb the pressure on natural resources, namely the reduction in transports costs and a boost to pace of innovation.
This article investigates the impact of trade liberalization on trade patterns, firm markups, and firm locations in a two-factor monopolistic competition model that features variable elasticity of substitution by a general additively separable utility. We find that, depending on the relative export hurdles, either direction of one-way trade may occur when trade opens up. Its direction determines the responses of firm-level markups and various home market effects to falling trade costs. Our results show that some important findings in the literature are robust only with particular classes of preferences. We provide a possible rationale for some well-known conflicting empirical facts. © The Author(s) (2018). Published by Oxford University Press. All rights reserved.
We show that the market does not systematically deliver the right technology under monopolistic competition. (i) Firms might rush on large-scale technology, pushing to the exit many desirable varieties produced by small firms. (ii) Firms might shun large-scale technology, though that technology would benefit the society through lower prices. (iii) A bias towards small-scale technology in some stage of development, and a bias towards large-scale technology in another stage is also a possibility.
This paper examines the relationship between resource development and industrialization. When transport costs are high, the region with a more valuable natural resource enjoys a higher welfare than the other region. However, as transport costs decrease, firms begin to move out of the region, causing the Dutch disease to occur, initially in terms of industry share, and eventually in terms of welfare too when transport is sufficiently free. A resource boom in intermediate inputs may strengthen the tendency for manufacturing agglomeration in the same region, but a resource boom in consumption inputs will weaken this tendency. The model thus provides insight for cities to utilize their limited resources efficiently.
We show that spatial inequalities in an economic space of multiple countries in terms of both nominal income and real income are ubiquitous in the sense that they appear when countries are differentiated by population only. A new trade theory model is constructed without any freely traded homogeneous good, so that we can examine the home market effect (HME) and the non-monotonic relation between income inequalities and globalization. Meanwhile, there are three HME definitions for a two-country space in terms of firm share, labor wage, and trade pattern. The first two remain applicable in a multicountry space, and they are shown to be equivalent. However, a natural extension of the third is not equivalent.
In this paper, we examine the effects of liberalization on industrial location and national welfare in a framework of new economic geography. Specifically, we explicitly incorporate arbitrary trade costs in both differentiated-good and homogeneous-good sectors into a two-country model, and clarify the effects of trade-barrier reduction in each sector. We show that their impacts on welfare levels in the two countries are different, and, if an industry is liberalized while the other is protected, a conflict between the countries might occur. Therefore, appropriate liberalization in both sectors is effective to alleviate such a conflict.
Does national market size matter for industrial structure? This has been suggested by theoretical work on "home market" effects. In the present paper, I show that what previously was regarded as an assumption of convenience -transport costs only for the differentiated goods - matters a great deal. In a focal case in which differentiated and homogeneous goods have identical transport costs, the home market effect disappears. This paper discusses available evidence on the relative trade costs for differentiated and homogeneous goods. No compelling argument is found that market size will matter for industrial structure. (JEL F1, 01, R1).
Tourism is now believed to provide an impetus to the economic progress of developing nations and its importance is gaining widespread recognition. In fact, the relationship between exports and growth is the subject of ongoing debate, but the nature of exports has received little attention. Despite the continuous efforts of developing countries to increase their exports, this strategy often adds little foreign exchange to their balance of payments. For many reasons, the non-traditional exports of developing countries have too often failed to prove effective in economic development and so tourism is increasingly seen as something of a saviour. This paper focuses on the success story of a small island economy, Mauritius. Once regarded as an extreme case of a mono-crop economy, relying very predominantly on the export of sugar, Mauritius is now a reputed exporter of non-traditional goods (textiles) and services (tourism). Using cointegration and causality tests, the author's results lend support to the contention that tourism has promoted growth, and further evidence suggests that tourism has a significant positive impact on Mauritian economic development.
The purpose of this article is twofold. First, we present an alternative model of agglomeration and trade that displays the main features of the recent economic geography literature while allowing for the derivation of analytical results by means of simple algebra. Second, we show how this framework can be used to permit (i) a welfare analysis of the agglomeration process, (ii) a full-fledged forward-looking analysis of the role of history and expectations in the emergence of economic clusters, and (iii) a simple analysis of the impact of urban costs on the spatial distribution of economic activities. Copyright Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
Abstract Most existing studies examine the home market effect (HME) in a framework with immobile labour as the only production factor and the assumption of a freely traded homogeneous good is known to be crucial for the HME to emerge. This study explores the HME in the presence of mobile capital by use of a footloose capital model allowing for positive transport costs of the homogeneous good. The mobile capital generates a channel to offset the trade imbalance of a country. As a result, the HME always appears for arbitrary transport costs in both sectors of differentiated and homogeneous goods.
La plup art des travaux existants étudient l’effet du marché domestique dans un cadre d’analyse où le travail immobile est le seul facteur de production et où le postulat d’un bien homogène librement échangé est considéré comme un élément crucial pour que l’effet du marché domestique émerge. Ce texte explore le phénomène dans le cas où le capital est mobile et où on utilise un modèle de capital libre comme l’air avec coûts de transport positifs pour le bien homogène. Le capital mobile engendre un canal pour compenser le déséquilibre commercial d’un pays. En conséquence, l’effet du pays domestique apparaît toujours pour des coûts de transport arbitraires dans les secteurs des biens différenciés ou homogènes.
This paper revisits the home market effect (HME) without any homogeneous good by reconstructing the footloose capital model. This simple model analytically reproduces some typical results scattered in the existing literature, and also provides new insights. Firstly, we derive both spatial inequalities in industrial location and in income. They are the home market effect in terms of firm share and wage: the larger country has a more-than-proportionate share of firms and a higher wage. These two HMEs are shown to be equivalent. Secondly, both the wage differential and the industrial location in the larger country evolve in an inverted U-pattern when transport costs decline. Finally, we analytically examine the effects of trade liberalization on the welfare and show that both countries may gain from globalization.
Tourism generates considerable income and employment in host countries and regions, which substantially improves local economies. Meanwhile, the manufacturing sector remains the most important part in regional and national economies. This paper investigates their interdependence through a general-equilibrium analysis. On the one hand, a tourism boom is pro-industrialization because the income generated by tourism attracts more manufacturing firms and, on the other hand, de-industrialization for attracting labour from the manufacturing sector. We clarify conditions of trade balances in three sectors. The welfare analysis clarifies conditions for the smaller country to be better off, and conditions for the equilibrium to be optimal.
Thirty years have passed since a small group of theorists began applying concepts and tools from industrial organization to the analysis of international trade. The new models of trade that emerged from that work didn’t supplant traditional trade theory so much as supplement it, creating an integrated view that made sense of aspects of world trade that had previously posed major puzzles. The "new trade theory"&emdash;an unfortunate phrase, now quite often referred to as "the old new trade theory"&emdash;also helped build a bridge between the analysis of trade between countries and the location of production within countries. In this paper I will try to retrace the steps and, perhaps even more important, the state of mind that made this intellectual transformation possible. At the end I'll also ask about the relevance of those once-revolutionary insights in a world economy that, as I'll explain, is arguably more classical now than it was when the revolution in trade theory began.
Concerning industrial location, the home market effect (HME) predicts that a large country is a net exporter of industrial goods. Recent literature shows that high transport costs in the traditional sector may obscure the HME in an early model of two sectors à la Helpman and Krugman. This paper presents an alternative model that displays the relationship between the HME and arbitrary transport costs while allowing for the derivation of analytical results by simple algebra. Our results show that the transport costs in the traditional sector do not obscure the HME but constitute a dispersion force that decreases the impact of the HME.
This study investigates the causal relations between tourism growth and economic expansion for the Korean economy by using Engle and Granger two-stage approach and a bivariate Vector Autoregression (VAR) model. Two principle results emerge from this study. First, the results of a cointegration test indicate that there is no long-run equilibrium relation between two series. Second, the outcomes of Granger causality test imply the one-way causal relationship of economic-driven tourism growth. The hypothesis of tourism-led economic growth is not held in the Korean economy. This consequence is supported by testing the sensitivity of causality test under different lag selections along with the optimal lag.
This study examines the causal relationship between tourism expansion and economic development in Taiwan. A Granger causality test is performed following the cointegration approach to reveal the direction of causality between economic growth and tourism expansion. Test results indicate a long-run equilibrium relationship and further a bi-directional causality between the two factors. In other words, in Taiwan, tourism and economic development reinforce each other. A discussion follows and managerial implications are identified based on the empirical findings.
Traditional neoclassical models of comparative advantage suggest that, all else equal, a country with idiosyncratically strong demand for a good will be an importer of that good. However, there is a contrary tradition that emphasizes the advantages of a large home market as a foundation for exports of a good. One recent formalization of this home market approach falls within what is termed the new economic geography. This paper integrates core models of Heckscher–Ohlin and Krugman [American Economic Review 70 (1980) 950] to investigate whether such home market effects matter empirically in manufacturing for a set of OECD countries. The evidence suggests that home market effects are important for a broad segment of OECD manufacturing.
The standard two-country model of international trade with monopolistic competition predicts a more-than-proportional relationship between a country′s share of world production of a good and its share of world demand for that same good, a result known as the ‘home market effect’. We first show that this prediction does not generally carry through to the multi-country case, as production patterns are crucially affected by third country effects. We then derive an alternative prediction that holds whatever the number of countries considered. This new prediction takes into account important features of the real world such as comparative advantage due to cross-country technological differences and lack of factor price equalization.
There are two principal theories of why countries or regions trade: comparative advantage and increasing returns to scale. Yet there is virtually no empirical work that assesses the relative importance of these two theories in accounting for production structure and trade. We use a framework that nests an increasing returns model of economic geography featuring `home market effects' with that of Heckscher–Ohlin. We employ these trade models to account for the structure of regional production in Japan. We find support for the existence of economic geography effects in eight of nineteen manufacturing sectors, including such important ones as transportation equipment, iron and steel, electrical machinery, and chemicals. Moreover, we find that these effects are economically very significant. The latter contrasts with the results of Davis and Weinstein (1996, Does economic geography matter for interactional specialiazation?, NEBR# 5706), which found scant economic significance of economic geography for the structure of OECD production. We conclude that while economic geography may explain little about the international structure of production, it is very important for understanding the regional structure of production.
This paper develops a simple model that shows how a country can endogenously become differentiated into an industrialized "core" and an agricultural "periphery. " In order to realize scale economies while minimizing transport costs, manufacturing firms tend to locate in the region with larger demand, but the location of demand itself depends on the distribution of manufacturing. Emergence of a core-periphery pattern depends on transportation costs, economies of scale, and the share of manufacturing in national income. The study of economic geography-of the location of factors of production in space-occupies a relatively small part of standard economic analysis. International trade theory, in particular, conventionally treats nations as dimensionless points (and frequently assumes zero transportation costs between countries as well). Admittedly, models descended from von Thunen (1826) play an important role in urban studies, while Hotelling-type models of locational competition get a reasonable degree of attention in industrial organization. On the whole, however, it seems fair to say that the study of economic geography plays at best a marginal role in economic theory. On the face of it, this neglect is surprising. The facts of economic geography are surely among the most striking features of real-world economies, at least to laymen. For example, one of the most remarkable things about the United States is that in a generally sparsely populated country, much of whose land is fertile, the bulk of the population resides in a few clusters of metropolitan areas; a quarter of the inhabitants are crowded into a not especially inviting section of the East Coast. It has often been noted that nighttime satellite
Revised: April 2001 This paper focuses on externalities between economic agents. We consider spatial dis- tribution of economic activities in a multiregional dynamical system, where regions may be interpreted as clubs, social subgroups, species, or strategies. Our dynamics includes gravity models and replicator dynamics as special cases. Assuming that other variables, such as prices are solved as a function of the population distribution, we analyze both interior and corner equilibria of spatial distribution in a general class of dynamics, including the replicator dynamics and the gravity model. We derive the exact conditions for stable equilibrium and give some interpretations of the stability conditions. We show that interior equilibria are stable in the presence of strong agglomeration economies, but unstable in the presence of strong congestion diseconomies.
Investigates the effects of an expansion of tourism on welfare, output and factor prices in the host country using a general equilibrium international trade model. In the absence of taxes, foreign ownership and distortions, an increase in foreign visitors will increase welfare only if the price of non-tradables increases. Factor mobility and foreign ownership tend to reduce the gains from tourism, while commodity taxes tend to increase them. Conditions under which an increase in tourism can lead to de-industrialization are also discussed. -Author
In a partially reformed economy, distortions beget distortions. Segments of the economy that are freed from centralized control
respond to the rent-seeking opportunities implicit in the remaining distortions of the economy. The battle to capture, and
then protect, these rents leads to the creation of new distortions, even as the reform process tries to move forward. In this
paper I illustrate this idea with a study of the People's Republic of China. Under the plan, prices were skewed so as to concentrate
profits, and hence revenue, in industry. As control over factor allocations was loosened, local governments throughout the
economy sought to capture these rents by developing high margin industries. Continued reform, and growing interregional competition
between duplicative industries, threatened the profitability of these industrial structures, leading local governments to
impose a variety of interregional barriers to trade. Thus, the reform process led to the fragmentation of the domestic market
and the distortion of regional production away from patterns of comparative advantage.
In the literature of new economic geography, it is observed that the manufacturing sector disperses because of high transportation costs, agglomerates for intermediate transportation costs, and redisperses for low transportation costs. This paper examines a model with multiple manufacturing industries and finds that the redispersion process is different from the dispersion process. More precisely, there is at most one industry that disperses in the redispersion process while all industries disperse in the dispersion process. Furthermore, it is shown that the interaction of demand, increasing returns, and transportation costs is enough to derive a separating equilibrium where at least two industries agglomerate in different regions.
We investigate an economic geography model in which agricultural goods are costly to transport and in which manufactures hire labor from the local agricultural sector as unskilled labor. We show that agricultural transport costs and local-unskilled labor requirements in firms act as a dispersion force. Location equilibria are compared with the first and second best outcomes and we show that their structure crucially depend on the parameters of agricultural sector.
Most of the theoretical and empirical studies on the Home Market Effect (HME) assume the existence of an "outside good" that absorbs all trade imbalances and equalizes wages. We study the consequences on the HME of removing this assumption. The HME is attenuated and, more interestingly, it becomes non-linear. The non-linearity implies that the HME is more important for very large and very small countries than for medium size countries. The empirical investigation conducted on a database comprising 25 industries, 25 countries, and 7Â years confirms the presence of the HME and of its non-linear shape.
We develop an analytically solvable version of the central model of ‘new economic geography’, the so called core‐periphery
model by Krugman. While the modified model reproduces all the appealing features of the original one, it also allows us to
obtain additional analytical results that are out of reach in Krugman's set‐up. First, we are able to assess the exact number
of equilibria and their global stability properties. Second, we are able to investigate the implications of exogenous asymmetries
between countries. This is achieved by introducing heterogeneity between high‐skill mobile and low‐skill immobile workers,
which may also be an empirically attractive property.