J.-F. ThisseCORE-UCLouvain (Belgium)

Paul Krugman’s New Economic Geography: past, present and future

Paul Krugman’s New Economic Geography: past, present and future

Economic geography seeks toexplain the riddle of unequal

spatial development

(at different spatial scales)

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Does Geography Matter?

“transport costs are almost universally ignored in trade

models in the sanguine hope that if included they would not

materially affect the results”(Deardorff)

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The Spatial Impossibility Theorem(backyard capitalism)

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What Are the Alternative Strategies?

- Comparative advantage (monocentric city)

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- Agglomeration externalities (spillover effects)

- Imperfect competition(i) oligopolistic competition (spatial competition)(ii) monopolistic competition (Dixit-Stiglitz)

The Beginnings of NEG

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The Principle of Differentiation

The Home Market Effect

Agglomeration at the market centeris a Nash equilibrium if t ⁄ 2μ ≤ 1

The Principle of Differentiation

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Spatial differentiation relaxes price competition

Pi(x) ≡exp −(pi + t |x − yi |) /µ

exp−(p j + t |x − y j |) /µj=1

n∑

The Home Market Effect

Two regions: H is bigger than F

Two production factors: (immobile) labor and (mobile) capital

Two production sectors

Using labor, one sector operates under constant returns, perfect competition and zero trade costs

Using labor and capital, the sector operates under increasingreturns, monopolistic competition and positive trade costs

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Samuelson’s iceberg trade costs

market access versus market crowding

Dixit-Stiglitz’ monopolistic competition: CES

HME: when one region is larger in terms of population and/or purchasing power, this region attracts a more

than proportional share of firms

Q= q(v)σ −1σ

O

M∫ ds⎛

⎝ ⎜

⎞

⎠ ⎟

σσ −1

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HME: when one region is larger in terms of population and/or

purchasing power, this region attracts a more

than proportional share of firms

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an initial size advantage is magnifiedby trade liberalization

The Core-periphery Structure

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or when physical capital is replaced by human capital

when workers move to a new place, they bring with them both their

production and consumption capabilities

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there is circular causation (à la Myrdal) :“manufactures production will tend to concentrate

where there is a large market, but the market will be large where manufactures production is concentrated”

(Krugman)

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Input-output Linkages

the agglomeration of the final sector in a particular region occurs because of

the concentration of the intermediate industry in the same region, and conversely

urban costs → bell-shaped curve:spatial concentration first increases,

then decreases

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Figure 2: Theil indices for the manufacturing sector

0

0,2

0,4

0,6

0,8

1860 1878 1895 1913 1930 1948 1965 1983 2000

Manu. Emp. Total Manu. Emp. Within Manu. Emp. Between

Figure 3: Theil indices for the service sector

0

0,2

0,4

0,6

0,8

1860 1878 1895 1913 1930 1948 1965 1983 2000

Ser. Emp. Total Ser. Emp. Within ser. Emp. Between

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What Next?

(i) More general models(ii) Strategic considerations

(iii) The dimensionality problem

“the Heckscher-Ohlin theorem is derived from a model of only two of each of goods, countries, and factors of production. It is unclear what the theorem says should be true in the real world where there are many of all three” (Deardorff)

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(iv) Local interactions → spatial scale

“density economies” :

log pl = α+ βlog den +ε

β ranges from 4 to 11%

endogeneity → simultaneity & omitted variables

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even when we account for a large number of explanatory variables and

econometric issues, agglomeration economies remain important

β is about 3%

the elasticity of wages with respect to density is largely explained by

differences in workers’ skill

(v) Cities + development

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(vi) Cities + trade + growth

(vii) Cities + trade + the supply chain

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Thank you for your attention