Working Paper: CEPR ID: DP886
Authors: Paul Krugman; Anthony J. Venables
Abstract: The paper considers the equilibrium location of two industries in two countries. Both industries are imperfectly competitive and produce goods which are used in final consumption and as intermediates by firms in the same industry. Intermediate usage creates cost and demand linkages between firms and a tendency for agglomeration of each industry. When trade barriers are high the equilibrium involves division of both industries between both locations in order to meet the final demands of consumers. At lower trade barriers agglomeration forces dominate and the equilibrium involves specialization, with each industry concentrated in a single location. Economic integration may induce specialization. The paper studies the simple dynamics of the model and demonstrates that during the adjustment process a sizeable proportion of the labour force may suffer lower real wages as relocation of industry occurs, although there are long-run gains from integration.
Keywords: industrial location; integration; agglomeration
JEL Codes: F1; F12; F15; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decrease in trade barriers (F19) | agglomeration of industries (R32) |
| agglomeration of industries (R32) | specialization (Z00) |
| agglomeration of industries (R32) | short-term declines in real wages for workers in contracting industries (J39) |
| agglomeration of industries (R32) | wage increases for workers in expanding industries (J39) |
| agglomeration of industries (R32) | reemployment of all workers at higher wages in expanded industry (J68) |