This paper considers the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumulation and technological change, a model emphasizing human capital accumulation through schooling, and a model emphasizing specialized human capital accumulation through learning-by-doing.

The mechanics of economic development

http://individual.utoronto.ca/zheli/sa1.pdf

On the mechanics of economic development

Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

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Endogenous Technological Change

This chapter aims to develop one of perhaps multiple specifications of embeddedness, a concept that has been used to refer broadly to the contingent nature of economic action with respect to cognition, social structure, institutions, and culture. Research on embeddedness is an exciting area in sociology and economics because it advances understanding of how social structure affects economic life. The chapter addresses propositions about the operation and outcomes of interfirm networks that are guided implicitly by ceteris paribus assumptions. While economies of time due to embeddedness have obvious benefits for the individual firm, they also have important implications for allocative efficiency and the determination of prices. Under the conditions, social processes that increase integration combine with resource dependency problems to increase the vulnerability of networked organizations. The level of investment in an economy promotes positive changes in productivity, standards of living, mobility, and wealth generation.

Social Structure and Competition in Interfirm Networks: The Paradox of Embeddedness

This paper develops a dynamic industry model with heterogeneous firms to analyze the intra-industry effects of international trade. The model shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry's exposure to trade lead to additional inter-firm reallocations towards more productive firms. The paper also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before. The paper adapts Hopenhayn's (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, the paper provides an extension of Krugman's (1980) trade model that incorporates firm level productivity differences. Firms with different productivity levels coexist in an industry because each firm faces initial uncertainty concerning its productivity before making an irreversible investment to enter the industry. Entry into the export market is also costly, but the firm's decision to export occurs after it gains knowledge of its productivity.

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The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity

This paper develops a simple model that shows how a country can endogenously become differentiated into an industrialized "core" and an agricultural "periphery." In order to realize scale economies while minimizing transport costs, manufacturing firms tend to locate in the region with larger demand, but the location of demand itself depends on the distribution of manufacturing. Emergence of a core-periphery pattern depends on transportation costs, economies of scale, and the share of manufacturing in national income. The study of economic geography-of the location of factors of production in space-occupies a relatively small part of standard economic analysis. International trade theory, in particular, conventionally treats nations as dimensionless points (and frequently assumes zero transportation costs between countries as well). Admittedly, models descended from von Thunen (1826) play an important role in urban studies, while Hotelling-type models of locational competition get a reasonable degree of attention in industrial organization. On the whole, however, it seems fair to say that the study of economic geography plays at best a marginal role in economic theory. On the face of it, this neglect is surprising. The facts of economic geography are surely among the most striking features of real-world economies, at least to laymen. For example, one of the most remarkable things about the United States is that in a generally sparsely populated country, much of whose land is fertile, the bulk of the population resides in a few clusters of metropolitan areas; a quarter of the inhabitants are crowded into a not especially inviting section of the East Coast. It has often been noted that nighttime satellite

/pdf/increasing-returns-and-economic-geography-51p2gbi38l.pdf

Increasing Returns and Economic Geography

"I have spent my whole professional life as an international economist thinking and writing about economic geography, without being aware of it," begins Paul Krugman in the readable and anecdotal style that has become a hallmark of his writings. Krugman observes that his own shortcomings in ignoring economic geography have been shared by many professional economists, primarily because of the lack of explanatory models. In Geography and Trade he provides a stimulating synthesis of ideas in the literature and describes new models for implementing a study of economic geography that could change the nature of the field.Economic theory usually assumes away distance. Krugman argues that it is time to put it back - that the location of production in space is a key issue both within and between nations.Paul Krugman is Professor of Economics at the Massachusetts Institute of Technology. He has been a consultant to the International Monetary Fund, the World Bank, the United Nations, the Trilateral Commission, and the U.S. State Department. He is a member of the Group of Thirty. His books include the recent bestselling Age of Diminished Expectations: U.S. Economic Policy in the 1990s.

Geography and Trade

Книга «Пространственная экономика – города, регионы и международная торговля» рассматривает экономику с точки зрения экономической географии – через определение, где и почему развился тот или иной вид экономической деятельности. Это новая глава в развитии экономической географии. Авторами предлагаются новые методы для моделирования, получившие начало в теориях экономического роста, международной торговли и промышленной организации. Более того, через многофакторный анализ «эффект повышения отдачи - транспортные издержки - движение продуктивных факторов» открываются возможности для новой экономической географии при решении проблем в городской, региональной и международной экономике.

The Spatial Economy: Cities, Regions, and International Trade

For some time now there has been considerable skepticism about the ability of comparative cost theory to explain the actual pattern of international trade. Neither the extensive trade among the industrial countries, nor the prevalence in this trade of two-way exchanges of differentiated products, make much sense in terms of standard theory. As a result, many people have concluded that a new framework for analyzing trade is needed.' The main elements of such a framework-economies of scale, the possibility of product differentiation, and imperfect competition-have been discussed by such authors as Bela Balassa, Herbert Grubel (1967,1970), and Irving Kravis, and have been "in the air" for many years. In this paper I present a simple formal analysis which incorporates these elements, and show how it can be used to shed some light on some issues which cannot be handled in more conventional models. These include, in particular, the causes of trade between economies with similar factor endowments, and the role of a large domestic market in encouraging exports. The basic model of this paper is one in which there are economies of scale in production and firms can costlessly differentiate their products. In this model, which is derived from recent work by Avinash Dixit and Joseph Stiglitz, equilibrium takes the form of Chamberlinian monopolistic competition: each firm has some monopoly power, but entry drives monopoly profits to zero. When two imperfectly competitive economies of this kind are allowed to trade, increasing returns produce trade and gains from trade even if the economies have identical tastes, technology, and factor endowments. This basic model of trade is presented in Section I. It is closely related to a model I have developed elsewhere; in this paper a somewhat more restrictive formulation of demand is used to make the analysis in later sections easier. The rest of the paper is concerned with two extensions of the basic model. In Section II, I examine the effect of transportation costs, and show that countries with larger domestic markets will, other things equal, have higher wage rates. Section III then deals with "home market" effects on trade patterns. It provides a formal justification for the commonly made argument that countries will tend to export those goods for which they have relatively large domestic markets. This paper makes no pretense of generality. The models presented rely on extremely restrictive assumptions about cost and utility. Nonetheless, it is to be hoped that the paper provides some useful insights into those aspects of international trade which simply cannot be treated in our usual models.

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Paul Krugman

Papers

Increasing Returns and Economic Geography

Geography and Trade

The Spatial Economy: Cities, Regions, and International Trade

Scale Economies, Product Differentiation, and the Pattern of Trade

Increasing returns, monopolistic competition, and international trade