Professional Documents
Culture Documents
Lecture1 Slides
Lecture1 Slides
Stephen Redding
Princeton University
1 / 35
Essential Reading
• Allen, Treb and Costas Arkolakis (2014) “Trade and the Topography
of the Spatial Economy,” Quarterly Journal of Economics, 129(3),
1085-1140.
2 / 35
Motivation
• Until the early 1990s, economic geography received relative little
attention in mainstream economic theory
• Despite the fact that production, trade and income are distributed
extremely unevenly across physical space
3 / 35
Motivation
• First-nature geography
– Physical geography of coasts, mountains and endowments of natural
resources
• Second-nature geography
– The spatial relationship between economic agents
4 / 35
Agglomeration Forces
• This lecture introduces Krugman (1991) and Helpman (1998)
– Love of variety, Increasing returns to scale and trade costs
6 / 35
Preferences
HUn 1−α
α
Cn
Un = , 0 < α < 1.
α 1−α
7 / 35
Production
xi ( j )
li (j ) = F + .
Ai
• Producer of each variety chooses prices to maximize profits subject
to its downward-sloping demand curve
xi ( j )
max pi (j )xi (j ) − wi F + .
pi ( j ) Ai
8 / 35
Profit Maximization and Zero-Profits
• First-order condition for profit maximization implies that prices are a
constant markup over marginal cost
σ wi
pi (j ) = pi = ,
σ−1 Ai
xi (j ) = x̄i = Ai (σ − 1)F
li (j ) = l¯ = σF .
9 / 35
Labor Market Clearing
• Labor market clearing requires demand equals the supply for labor
Li = Mi l¯
10 / 35
Price Indexes
11 / 35
Expenditure Shares
πni = 1− σ
= 1− σ .
∑k ∈N Mk pnk
w
∑k ∈N Lk dnk Ak k
• Using the denominator of the expenditure share, the price index can
be re-written as:
1
σ Ln 1− σ wn
Pn = .
σ−1 σF πnn An
12 / 35
Land Market Clearing
• Per capita income in each location (vn ) equals labor income (wn )
plus per capita expenditure on residential land ((1 − α)vn ):
wn Ln
vn Ln = wn Ln + (1 − α)vn Ln = .
α
• Land market clearing implies that the equilibrium land rent (rn ) can
be determined from the equality of land income and expenditure:
(1 − α)vn Ln 1 − α w n Ln
rn = = ,
Hn α Hn
13 / 35
Population Mobility
• Using the price index, income equals expenditure, and land market
clearing in the population mobility condition, we obtain:
σ (1−α)−1
−α/(σ−1) −
Aα H 1−α πnn Ln σ − 1
V̄ = n n
σ
α 1 1− σ 1− α 1− α
α
α σ− 1 σF α
14 / 35
Gains from Trade and Market Access
15 / 35
General Equilibrium
16 / 35
Population Mobility
vn
Pnα = .
V̄ rn1−α
• Using vn = wn /α and land market clearing (rn = 1−
α
α wn Ln
Hn )
1− α " #1
1 − α 1− α
α
wn Hn α
Pn = , W̄ ≡ α V̄ .
W̄ Ln α
• Recall
1 " 1−σ # 1−1 σ
σ 1 1− σ wi
Pn =
σ−1 σF ∑ Li dni
Ai
.
i ∈N
17 / 35
Gravity I
wiσ A1i −σ = ∑ 1− σ σ 1− σ
πnn dni wn An .
n ∈N
18 / 35
Gravity II
• Recall price index from previous slide
1− σ
Ln σ wn
σF σ − 1 An
Pn1−σ = .
πnn
• Recall price index from population mobility
1− α " #1
1 − α 1− α
α
wn Hn α
Pn = , W̄ ≡ α V̄ .
W̄ Ln α
19 / 35
Gravity III
wiσ A1i −σ = ∑ 1− σ σ 1− σ
πnn dni wn An .
n ∈N
• Using our expression for the domestic trade share on previous, slide
this wage equation from gravity becomes
1− σ
wiσ A1i −σ
1− σ 1 σ
W̄ = .
σF σ−1 1− σ 1−(σ−1) 1−α α (σ−1) 1−α α
∑n∈N dni Ln Hn wnσ
20 / 35
General Equilibrium I
21 / 35
General Equilibrium II
σ−1
σ̃ ≡
,
2σ − 1
1−α
γ1 ≡ σ ,
α
σ 1−α
γ2 ≡ 1 + − ( σ − 1) .
σ−1 α
22 / 35
Existence and Uniqueness
Proposition
Assume σ (1 − α) > 1. Given the land area, productivity and amenity
parameters {Hn , An , Bn } and symmetric bilateral trade frictions {dni } for
all locations n, i ∈ N, there exist unique equilibrium populations (Ln∗ )
that solve this system of equations.
Proof.
The proof follows Allen and Arkolakis (2014). Assume σ (1 − α) > 1.
Given the land area and productivity for each location {Hn , An } and
bilateral trade frictions {dni }, there exists a unique fixed point in this
system because γ2 /γ1 < 1 (Fujimoto and Krause 1985).
Lit
MPnt = ∑ dist ni
i ∈N
24 / 35
Wages and Market Access
• From profit maximization
σ wi
pi (j ) = pi = ,
σ−1 Ai
xi (j ) = x̄i = Ai (σ − 1)F
x̄i = piσ ∑ 1− σ
dni (wn Ln ) (Pn )σ−1 ,
n ∈N
25 / 35
Wages and Market Access
• Combining profit maximization, zero profits, CES demand and
market clearing, we obtain the following wage equation:
σ wi σ
1
= FMAi
σ − 1 Ai x̄i
σ −1
σ−1
σ −1
σ
− σ1 1
wi = Ai σ
(l¯) (FMAi ) σ .
σ
• where firm market access is defined as
FMAi ≡ ∑ 1− σ
dni (wn Ln ) (Pn )σ−1 ,
n ∈N
27 / 35
Estimating Market Access
• Use international trade data to “reveal” market access
• CES demand function
1− σ
Xni = si dni mn ,
si ≡ Mi pi1−σ , mn ≡ Xn Pnσ−1 ,
• Firm and consumer market access can be written:
FMAi = ∑ 1− σ
dni mn , CMAn = ∑ si dni1−σ
n ∈N i ∈N
• Using income equals expenditure, the price index and land market
clearing, together with the definitions of firm and consumer market
access, this population mobility condition can be written as:
( α σ −1 ) α α
Ln = χAn 1−α σ Hn (FMAn ) (1−α)σ (CMAn ) (1−α)(σ−1) ,
29 / 35
Firm and Consumer Market Access
• Firm and consumer market access are closely related
• From the definitions of firm and consumer market access:
FMAi ≡ ∑ 1− σ
dni (wn Ln ) CMAn−1 .
n ∈N
• Note that CES demand implies the following gravity equation for
bilateral exports from location i to location n:
1− σ
Li σ wi 1− σ
Xni = dni (wn Ln ) CMAn−1 ,
σF σ − 1 Ai
• where we have used Xn = αvn Ln = wn Ln .
30 / 35
Firm and Consumer Market Access
• Summing across destinations and using goods market clearing
(Xi = ∑n∈N Xni = wi Li ), we obtain:
σ wi 1 − σ
Li
wi Li =
σF σ − 1 Ai ∑ dni1−σ (wn Ln ) CMAn−1 .
n ∈N
CMAi ≡ ∑ 1− σ
din (wn Ln ) FMAn−1 .
n ∈N
31 / 35
Firm and Consumer Market Access
FMAi ≡ ∑ 1− σ
dni (wn Ln ) ψ−1 FMAn−1 ,
n ∈N
FMAi ≡ ∑ 1− σ
dni (wn Ln ) ψ−1 FMAn−1 ,
n ∈N
• where we determined wn and Ln from our GE system above
• Therefore with symmetric trade costs firm and consumer market
access can be reduced to a single market access measure
32 / 35
References
• Allen, Treb and Costas Arkolakis (2014) “Trade and the Topography
of the Spatial Economy,” Quarterly Journal of Economics, 129(3),
1085-1140.
• Anderson, James and Eric van Wincoop (2003) “Gravity with
Gravitas: A Solution to the Border Puzzle,” American Economic
Review, 93(1), 170-192.
• Dekle, Robert and Jonathan Eaton (1999) “Agglomeration and Land
Rents: Evidence from the Prefectures,” Journal of Urban
Economics, 46(2), 200-214.
• Donaldson, D., and R. Hornbeck (2016) “Railroads and American
Economic Growth: A Market Access Approach,” Quarterly Journal
of Economics, 131(2), 799-858.
• Fujimoto, T. and U. Krause (1985) “Strong Ergodicity for Strictly
Increasing Nonlinear Operators,” Linear Algebra and its
Applications, 71, 101-112.
33 / 35
References
34 / 35
References
35 / 35