Abstract
Globalization is a much used and abused words. After clarifying its meaning, the present chapter examines the relations between location of production, cost of transport, and international trade in the context of both the traditional and the new theories of international trade. Particular attention is given to the core-periphery model, but other models are also examined, such as housing congestion, input-output linkages, footlose capital, etc.
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Notes
- 1.
We use the terminology adopted in the early new economic geography literature. Clearly though, “region” should be understood as a geographical unit (region, country, or else) and “farmers” and “workers” as a geographically immobile and mobile factor, respectively.
- 2.
See Ricci (1999) for an interesting extension where the marginal labor input, c, differs between countries.
- 3.
See Sect. 23.2.1 for a formal derivation of demand functions from S-D-S preferences.
- 4.
This migration mechanism implies that migration decisions are taken by comparing current real wage differentials and neglecting the future evolution of real wages. For extensions of the core-periphery model that explicitly take account of expectations on future real wage differentials see Krugman (1991b), Baldwin (2001), and Ottaviano (1999, 2001).
- 5.
More complex functional forms may be used for Eq. (16.6) but this simple form suffices for our expositional purposes. Note also that it suffices to write only one law of motion since \(\lambda _{2} = 1 -\lambda _{1}\) at any time.
- 6.
The model determines the two values of τ that divide the set (0, 1) into the three segments corresponding to ‘high’, ‘intermediate’ and ‘low’ trade costs. See Baldwin, Forslid, Martin, Ottaviano, and Robert-Nicoud (2003) for an exhaustive treatment of this matter.
- 7.
- 8.
- 9.
Since housing services are part of total consumption the cost of housing is part of the total cost of living. To keep terminology close to the literature, however, we continue to refer to the cost of living linkage as to the linkage driven by the price index of manufactures, P i . We refer instead to the cost of housing linkage as to the linkage driven by the price of housing, P i H.
- 10.
See Alonso-Villar (2005) for an extension to this model where there are input-output linkages between two manufacturing industries and trade costs differ between industries.
- 11.
See Nocco (2005) for an extension of this model where there are endogenous differences in technology levels due to interregional knowledge spillovers.
- 12.
- 13.
The condition for both countries being producers of A in any geographic configuration is that industry M is small enough to fit in one country.
- 14.
Perfect competition in the labor market makes it impossible for w to rise.
- 15.
To solve the model note that aggregate operating profit in the world economy is N π o where the subscript i is suppressed since π 1 o = π 2 o. By virtue expression (16.14), N π o is equal to the fraction \((\mu -1)/\mu\) of world sales. World sales are equal to world expenditure which in turn is equal to world income. Furthermore, \(N = \overline{K}\). Therefore we have the equation \(\overline{K}\pi = \frac{\mu -1} {\mu } \gamma \left (L + \overline{K}\pi \right )\). From this equation we obtain π ∗ and all the other endogenous variables.
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Gandolfo, G. (2014). Globalization and Economic Geography. In: International Trade Theory and Policy. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-37314-5_16
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