Transport costs and new economic geography
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This paper uncovers some little-known properties of the iceberg transport cost functions which are employed in some new economic geography models. In particular the behaviour of the delivered prices generated by the Krugman iceberg specification is very different to those generated by the original Samuelson iceberg model, and these differences require careful interpretation of the outcomes of the explicitly spatial versions of new economic geography models. If the iceberg model is viewed simply as transport costs, then these properties can be shown to be largely implausible when compared with a wide range of empirical evidence. At the same time, even if the iceberg model is viewed as capturing a range of different distance costs, there are still grounds for cautiousness in the way that inferences are made from these models when moving from theory to reality or policy analysis.Keywords:
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Journal Article Taking geographical economics out of equilibrium: implications for theory and policy Get access Christopher S. Fowler Christopher S. Fowler * * University of Washington, Department of Geography, Seattle, WA 98195-3550, USA. email Search for other works by this author on: Oxford Academic Google Scholar Journal of Economic Geography, Volume 7, Issue 3, May 2007, Pages 265–284, https://doi.org/10.1093/jeg/lbm006 Published: 21 March 2007 Article history Received: 06 June 2006 Accepted: 12 February 2007 Published: 21 March 2007
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We develop a general model to assess the pros and cons of the iceberg approach compared to alternative ways of modelling transportation in international trade. The main contributions of the literature are encompassed as special cases. Since iceberg costs are introduced in the Heckscher- Ohlin framework, the assessment is made in that framework. Iceberg costs imply restrictive assumptions on the transportation technology that have major reductive effects on most of the alluring results of that framework. Nonetheless they are defensible as a simple and elegant way of overcoming the endemic indeterminacy of that framework when dealing with more traded than non-traded goods. However, since iceberg costs are the workhorse model in many other situations where no problem of indeterminacy arises, we wonder whether the passive devotion to the iceberg approach is covering some of the most relevant issues that arise when trying to think realistically about the liberalization of world trade.
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FOR more than four decades the construction of a general location theory has been a stimulating challenge to spatial theorists. Despite the productive efforts of Weber, Englander, Predohl, Ohlin, Palander, Hoover, Losch, and others, the goals of spinning a theoretical web and specifying the design of a corresponding operational model are still remote.2 However, the comparatively recent pioneering contributions of Leontief in developing input-output techniques for general equilibrium analysis are of consequence here. They permit an attack upon a specific set of significant problems which logically fall within the jurisdiction of a general theory of location and space-economy. analysis of changing interregional economic bonds and flows can be approached from several directions. input-output method as elaborated here implicitly assumes, for the most part, unchanging spatial relations between any producer and his suppliers. Only a limited amount of industrial relocation can be tolerated with any change in the basic parameters of the economic system at any given point of time. An alternative approach has been sketched for example in an unpublished memorandum by Koopmans.3 Such an approach would treat the space factor explicitly. It would permit major variation in the spatial extent of production for each firm and in the pattern of production and resource utilization. It would be consistent with major relocation of industry and population. It would reveal how distance actively conditions interregional economic relations.4 An operational model following this alternative, more desirable, approach is yet to be developed. This paper is concerned with the much more limited assignment of regional and interregional analysis within the rigid spatial framework necessitated by the postulates of input-output analysis.5 'The analysis in this article has greatly benefited from discussions with Guy Freutel and with Wassily W. Leontief, James S. Duesenberry, Leon Moses, and other members of the Harvard Economic Research project. However, the shortcomings of the analysis and the views expressed herein are the author's only. model to be developed through spatial aggregation is basically different from one constructed by Professor Leontief through national disaggregation (in his forthcoming Studies in the Structure of the American Economy, Chapter 4). Nevertheless, the two models should not be viewed as alternatives. Rather they are complements. Leontief balanced regional model is particularly useful for determining regional implications of national projections; the pure interregional model, for determining national implications of regional projections. (For elaboration of this point, see W. Isard and G. Freutel, Regional and National Product Projections and Their Interrelations, sections 7 and 8, paper prepared for Conference on Research in Income and Wealth, National Bureau of Economic Research, May 195I,) Since one can proceed by degrees from one type of model to the other, it is likely that after considerable experimentation an hybrid model, involving elements of both, may prove to have the most general utility. author's experience in directing the preparation and collection of the data and in carrying through the computations for the Leontief model has been of great value in setting up a feasible design for his own model. 'For a presentation and evaluation of these efforts see W. Isard, The General Theory of Location and SpaceEconomy, Quarterly Journal of Economics, Vol. 63 (November I949), pp. 476-506. 3T. Koopmans, Optimum Geographical Distribution of Population and Industry in the United States (Cowles Commission for Research in Economics, January I946). 'Though trade theory is basically concerned with flows, it has by and large ignored or set aside the space factor. This is in line with the economic theorist's customary preoccupation with the time factor. ;;Treating space implicitly or as a passive factor has also been characteristic of the better regional development studies. Colin Clark in his excellent works on economic progress in the various regions and nations of the world (The Conditions of Economic Progress, London, I940, and Economics of I960, London, I942) does not attempt at all to study the basic changes in the spatial interrelations and patterns of these nations or regions. Nor does he probe into the diverse spatial structures of nations and regions at a given point of time. To be sure, he makes spatial comparisons in the sense that he compares nations having different latitudinal and longitudinal positions. But such comparisons more accurately fall under the heading of description, not spatial analysis. A. J. Brown (Industrialization and Trade, London, I943, and Applied Economics, London, I947), in ascribing a significant role to the world's uneven pattern of resources and its implications for specialization and the global locational structure of industry, takes a major step forw7ard. But he does not transcend geographic positional analysis. He does not expose the fundamental spatial scaffolding of international relations. Nor do E. F. Staley (Woorld Economic Development, Montreal, I944), the
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This paper develops a decision-theoretic approach to policy analysis.We argue that policy evaluation should be conducted on the basis of two factors: the policymaker's preferences, and the conditional distribution of the outcomes of interest given a policy and available information.From this perspective, the common practice of conditioning on a particular model is often inappropriate, since model uncertainty is an important element of policy evaluation.We advocate the use of model averaging to account for model uncertainty and show how it may be applied to policy evaluation exercises.We illustrate our approach with applications to monetary policy and to growth policy.
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For reasons of analytical tractability, new economic geography (NEG) models treat geography in a very simple way: attention is either confined to a simple 2-region or to an equidistant multi-region world. As a result, the main predictions regarding the impact of e.g. diminishing trade costs are based on these simple models. When doing empirical or policy work these simplifying assumptions become problematic and it may very well be that the conclusions from the simple models do not carry over to the heterogeneous geographical setting faced by the empirical researcher or policy maker. This paper tries to fill this gap by adding more realistic geography structures to the Puga (1999) model that encompasses several benchmark NEG models. By using extensive simulations we show that many, although not all, conclusions from the simple models do carry over to our multi-region setting with more realistic geography structures. Given these results, we then simulate the impact of increased EU integration on the spatial distribution of regional economic activity for a sample of 194-NUTSII regions and find that further integration will most likely be accompanied by higher levels of agglomeration.
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Economic forecasts are a projection of past historic data based on a mathematical model of the economy. Many assumptions (i. e. guesses) have to be made in setting up runs on the model; not all will be justified by events. Hence a wide variety of predictions can exist even for one model, and for any given national economy there are often several models in contention. Because the purpose of such predictions is to take action to secure desired performance in the economy, control theory finds a useful role in this context. Once an unpredicted perturbation has ‘blown the economy off course’, it is clear that control theory can be used to specify necessary action for recovery. However, the advantages of an alliance between control theory and economics are more varied than might at first be supposed and can have a beneficial influence on the quality of the predictions as well. Examples in two areas of concern will be discussed and exemplified by models of the U. K. economy.
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Despite the fact that SAMs are widely used as the databases for CGE models there remains some confusion over the relationship between the two; in particular the implications and meaning of the 'law of one price’ appear to be poorly understood. This has two clear, and arguably, worrying implications. First, a deficiency in understanding the accounting relationships in a SAM means that when compiling a SAM it is likel that the structural relationships in the economy may be misrepresented. And second, any misunderstanding of the behavioural relationships in a CGE model, which can be defined as theory with numbers, is highly likely to lead to flawed interpretations of the results from such models. The discussion in this paper revisits the issues of the role of a price system in social accounts and then demonstrates how the resultant price definitions require that all whole economy models that satisfy the conditions of being both complete and consistent MUST obey the 'law of one price’. The relevance of the 'law’ to the characteristics of certain features of CGE models is demonstrated as is its relevance to the compilation of SAMs.
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Journal Article Transport costs and new economic geography Get access Philip McCann Philip McCann Search for other works by this author on: Oxford Academic Google Scholar Journal of Economic Geography, Volume 5, Issue 3, June 2005, Pages 305–318, https://doi.org/10.1093/jnlecg/lbh050 Published: 24 February 2005 Article history Received: 09 January 2003 Accepted: 10 August 2004 Published: 24 February 2005
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