Title: Space and Economics (or did Krugman deserve his Nobel Prize?)
1Space and Economics(or did Krugman deserve his
Nobel Prize?)
Departamento de Economia Universidade de São Paulo
2Road map
- Motivation
- Facts
- Questions
- Concentration and Dispersion
- Beyond my scope
- Constant returns
- Increasing returns
- The Dixit-Stiglitz Approach
- Krugman and the NEG
- Growth and Agglomeration
- Moving goods x moving ideas
- Beyond geographical space
3MotivationUnderstanding Economic Landscapes
- Spatial analytical structures can help to shed
light on a number of relevant economic issues - The implications of the spatial configuration of
economic activities are numerous, affecting,
among other things economic growth, industrial
organisation, technological progress, welfare
levels, inequality, and environmental problems - Space has not to be necessarily geographical
space.
4FactsAgglomerations
- The spatial distribution of population and
economic activities is extremely unequal. - At any geographical scale it is the case that
agglomerations are pervasive. - At a global scale it is easy to see that income
and GDP are concentrated in a small number of
countries. - However, the spatial concentration within
countries is equally important, with economic
landscapes reflecting the variety of cities and
urban systems.
5Facts Cities, Clusters and Industrial Districts
- On the one hand we see large metropolises such as
New York, London, Paris and Tokyo (or Sao Paulo,
Mexico City and New Delhi). - On the other, there are specialised cities or
regions forming industrial districts and economic
clusters such as the Silicon Valley or the Third
Italy.
2
6FactsInternal Structure of Cities
- Agglomerations are also found at smaller scales,
forming the internal structure of cities. - We see commercial districts where shops and
restaurants cluster in neighbourhoods or even in
a single street (one could also think of offices
and job centres) - In the extreme case we can think of a shopping
mall as a small agglomeration.
7Questions
- What are the economics behind the tendency for
people and firms to agglomerate in space? - What are the agglomeration advantages?
Disadvantages? - What are the incentives for formation of urban
systems (and rural areas)? - What are the implied dynamics generated by
different spatial configurations?
8Concentration and Dispersion
- In general, the spatial configuration of economic
activity is the outcome of processes combining
two groups of opposite forces agglomeration
forces and dispersion forces. - The recent literature of spatial economics
emphasizes the fundamental link between these
forces and the existence of transport costs,
increasing returns to scale, externalities and
imperfect market structures.
9Concentration and Dispersion
10Beyond my Scope
- German tradition (Christaller, Losch, Weber)
- Regional Science (Isard)
- Economic Geographers
- Kaldor
- Evolutionary economics
- Trade issues
- ...I have no ambitions to do justice to the field!
11Models with Constant Returns
- Starret and the Spatial Impossiblity Theorem
- Thunens monocentric cities
- Hotelling and market areas
12The Role of Increasing Returns
- Indivisibilities
- Adam Smith and market size
- Alfred Marshall and industrial districts
- Jane Jacobs and city life
- Limits to increasing returns (congestion effects).
13Innovation and Tacit Knowledge
- Increasing returns to innovation is crucial for
understanding the performance of urban areas - Different places host different combinations of
Marshall and Jacobs Externalities - The concept of tacit knowledge is key in the
theoretical literature. - Empirical testing is a major issue.
14Modern Modelling ApproachesThe Increasing
Returns Revolution
- Dixit, Avinash K. and Stiglitz, Joseph E.
"Monopolistic Competition and Optimal Product
Diversity." American Economic Review, June 1977,
67(3), pp. 297-308 - Krugman, Paul R. (1979), "Increasing Returns,
Monopolistic Competition, and International
Trade", Journal of International Economics, 9(4)
469-479. - Romer, P. (1986). Increasing returns and
long-term growth. Journal of Political Economy,
94(5) 1002-37. - Krugman, Paul, 1991. Increasing Returns and
Economic Geography, Journal of Political
Economy, vol. 99(3), pages 483-99.
15The Dixit-Stiglitz Approach
- Application Industrial Organisation
-
- Structure 2 sectors economy (one Walrasian one
facing monopolistic competition and subject to
increasing returns) - Market size, love for variety and external
economies.
16Utility Function
Subutility Function
17Love for Variety
(CES)
- The parameter rho represents the intensity of the
preference of variety. - When rho is close to 1 manufactured goods are
nearly perfect substitutes. - As rho decreases toward zero, the desire to
consume a greater variety of goods increases.
18Internal Increasing Returns
Labour requirement in the manufacturing sector
19The Core-Periphery Model
- The workhorse of the so-called New Economic
Geography was first proposed by Krugman (1991)
and has been labelled as the Core-Periphery
Model. - Although recognising the value of the three
sources of externalities originally proposed by
Marshall, in the Core-Periphery Model Krugman
adopts a highly parsimonious setup
(Dixit-Stiglitz) focused on increasing returns,
pecuniary externalities and transport costs
20The C-P Model
- The Core-periphery model has been celebrated for
providing several insights about the geography of
economic activities through behavioural and
formalised models. - However, it has important limitations as well.
21Transport Costs(Samuelsons Iceberg)
Migration Equation
22Source Baldwin et al (2003)
23The 3 Effects
- The mechanics of the model is driven by three
effects -
- market access,
- cost of living,
- market crowding.
24Tomahawk Diagram
Source Baldwin et al (2003)
25Policy Implications
- threshold effects
- Discontinuities
- hysteresis.
26Whats New About NEG?
- Since 1990 a new genre of research, often
described as the new economic geography, has
emerged. It differs from traditional work in
economic geography mainly in adopting a modelling
strategy that exploits the same technical tricks
that have played such a large role in the new
trade and new growth theories these modelling
tricks, while they preclude any claims of
generality, do allow the construction of models
thatunlike most traditional spatial analysisare
fully general-equilibrium and clearly derive
aggregate behaviour from individual maximization.
-
- The new work is highly suggestive, particularly
in indicating how historical accident can shape
economic geography, and how gradual changes in
underlying parameters can produce discontinuous
change in spatial structure. It also serves the
important purpose of placing geographical
analysis squarely in the economic mainstream.
Krugman (1998)
27Neary on NEG
- The problem with this kind of model is that it is
too simple. The focus is on monopolistic
competition as the cause of agglomeration. - It is true there is some benefit to be derived
from focussing on a single feature, this type of
model is essential for understanding the world. - But no monocausal model can hope to capture the
complexity of any applied problem, certainly not
one where firms are all identical, infinitesimal
in size, the CES function is so important to the
outcome and externalities are dealt with in such
a limited way.
28Glaeser on Krugman
- Krugman (1991) shows that a brilliant theorist
can explain cities without non-market
interactions. But it is less obvious to me why
one would want to do so. The flow of ideas and
values that occurs through face-to-face
interaction may be the most interesting feature
of a city - E. Glaeser (1999)
29Agglomeration and Growth
- By introducing externalities associated with
knowledge accumulation it is possible to merge
spatial with growth models (see Baldwin et al
2003) - Key Issues
- The spatial equity-efficiency trade-off
- Static losses x dynamic gains
- Moving goods x moving ideas
30Global x Local Spillovers
- Baldwin et al (2003) propose 2 different models
one with global spillovers and another with local
spillovers. - They aim to capture the impact of knowledge
transfers of different kinds.
31Local Spillovers - Forces
- Endogenous growth and knowledge accumulation as
agglomeration forces - Knowledge spillovers as a dispersion force
32Local Spillovers - Outcomes
- Policies reducing transport costs for goods
encourage agglomeration - Policies that lower the cost of transporting both
goods and public knowledge may avoid extreme
agglomeration. - Key Congestion levels in central areas
33Glaeser and Kolhase
- Transport costs are still important, but the
relevant transport costs are likely to be for
moving people, not goods. - The advantages from proximity to other people
appear to come from saving the costs of providing
and acquiring services and from improving the
flow of knowledge.
34Transport Revenues
35Income x Density
36Business Services x Density
FIRE Finance, Insurance and Real Estate
37Manufacturing x Density
38Explaining the Past?
- urban economics and the new economic geography
need updating. - Both frameworks are analytically beautiful and
remarkably apt characterisations of the city of
the past. - But a new regional model, without centres and
without transport costs for goods, will better
capture the future of the city.
39Understanding the Future
- Glaeser and Kohlhase view is that such a model
would have the following basic elements - Productivity would be a function of agglomeration
because there are gains from people being able to
interact. - The key transport mode the automobile travels
much faster on highways than on city streets and
is subject to congestion effects.
40Understanding the Future
- 3. Physical output is generally relatively
costless to ship. - Even though output is almost costless to ship,
most people produce services that require
facetoface interaction. Moving people is still
expensive. - Land is heterogeneous and some places are nicer
than others.
41Beyond Geographycal Space
- Economic distances
- Product characteristics
- Political spectrum
- Knowledge space
42Spatial Economic Analysis
- http//www.tandf.co.uk/journals/titles/17421772.as
p