Working Paper: NBER ID: w3275
Authors: Paul Krugman
Abstract: This paper develops a two-region, two-sector general equilibriun model of location. The location of agricultural production is fixed, but ionopolistcally competitive manufacturing finns choose their location to maximize profits. If transportation costs are high, returns to scale weak, and the share of spending on manufactured goods low, the incentive to produce close to the market leads to an equal division of manufacturing between the regions. With lower transport costs, stronger scale economies, or a higher manufacturing share, circular causation sets in: the more manufacturing is located in one region, the larger that region's share of demand, and this provides an incentive to locate still more manufacturing there. Thus when the parameters of the economy lie even slightly on one side of a critical "phase boundary", all manufacturing production ends up concentrated in only one region.
Keywords: economic geography; manufacturing concentration; regional divergence
JEL Codes: R12; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high transportation costs and weak economies of scale (F12) | even distribution of manufacturing across regions (R12) |
| lower transportation costs or stronger scale economies or higher share of spending on manufactured goods (F12) | concentration of manufacturing closer to markets (L23) |
| concentration of manufacturing in one region (L69) | increases that region's share of demand (R22) |
| increased share of demand (R22) | further concentration of manufacturing in that region (L69) |
| small changes in economic parameters (transportation costs, economies of scale, spending shares) (F61) | significant changes in regional population distribution (R23) |