Working Paper: CEPR ID: DP8495
Authors: Holger Breinlich; Alejandro Cua
Abstract: We draw attention to the role of economic geography in explaining important cross-sectional facts which are difficult to account for in existing models of industrialization. By construction, closed-economy models that stress the role of local demand in generating sufficient expenditure on manufacturing goods are not suited to explain the strong and negative correlation between distance to the world's main markets and levels of manufacturing activity in the developing world. Secondly, open-economy models that emphasize the importance of comparative advantage are at odds with a positive correlation between the ratio of agricultural to manufacturing productivity and shares of manufacturing in GDP. This paper provides a potential explanation for these puzzles by nesting the above theories in a multi-location model with trade costs. Using a number of simple analytical examples and a full-scale multi-country calibration, we show that the model can replicate the above stylized facts.
Keywords: Economic Geography; Industrialization; International Trade
JEL Codes: F11; F12; F14; O14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| proximity to foreign markets (F10) | manufacturing shares in GDP (L60) |
| higher agricultural productivity (Q11) | increased demand for manufacturing goods (L60) |
| increased demand for manufacturing goods (L60) | manufacturing shares in GDP (L60) |
| trade costs (F19) | manufacturing shares in GDP (L60) |