Economic Geography and International Trade

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This research will develop and empirically test models of the location of production within countries, as a way of shedding light on the forces driving international trade and investment. The theoretical part of the research will use models of imperfectly competitive markets in which there are increasing returns to scale to analyze the processes leading to geographical concentration of production. This will involve modeling both concentration at an aggregate level - the division of countries into densely populated "core" regions and less dense "peripheries" -and the emergence of high geographical concentration of the production of many manufactured goods and some services. The models will borrow techniques from both the new trade theory and the new growth theory. Key themes will be path dependence, i.e., dependence of eventual outcomes on initial conditions, and the observation that the qualitative character of economic geography depends in predictable ways on a few key economic parameters, such as transport costs, scale economies, and the nonagricultural share of employment. The empirical research will use US Census data and comparable data from other countries (especially Europe) to test these models and compare interregional with international specialization and trade. A central project is to use US data to compute indices of geographic concentration for a large number of industries, and then to compare these indices with industry characteristics in order to discriminate between alternative explanations of concentration. A second project will use historical evidence to test for the kinds of qualitative changes, critical mass phenomena, and other nonlinear features predicted by the theoretical models. This project is important because it attempts to integrate economic geography with international trade theory. With this study, we will be better equipped to understand the likely effects of the 1992 economic integration in Europe and the US- Canada Free Trade Agreement.