Working Paper: CEPR ID: DP1845
Authors: Richard E. Baldwin
Abstract: The ?new? economic geography focuses on the footloose-labour and the vertically-linked industries models. Both are complex, since they feature demand-linked and cost-linked agglomeration forces. The paper presents a simpler model, where agglomeration stems from demand-linked forces arising from endogenous capital with forward-looking agents. The model?s simplicity permits many analytic results (rare in economic geography). Trade-cost levels that trigger catastrophic agglomeration are identified analytically, liberalization between almost equal-sized nations is shown to entail ?near-catastrophic? agglomeration, and Krugman?s informal stability test is shown to be equivalent to formal tests in a fully specified dynamic model.
Keywords: economic geography; trade and growth; neoclassical growth
JEL Codes: F13; F20; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in trade costs (F12) | catastrophic agglomeration (R11) |
| rise in home capital stock (R31) | increased expenditure (H59) |
| increased expenditure (H59) | further capital accumulation (E22) |
| small increase in protection for home firms (F23) | enhanced operating profits for home firms (F23) |
| small increase in protection for home firms (F23) | diminished operating profits for foreign firms (F23) |
| enhanced operating profits for home firms (F23) | increased capital formation at home (F21) |
| diminished operating profits for foreign firms (F23) | capital decumulation abroad (F21) |
| increased expenditure in home nation (H59) | encourages investment and growth (O16) |
| decline in capital and income abroad (F21) | increased expenditure in home nation (H59) |