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Economic Growth over

Time and Space


Lecture 4
Lund University, Fall 2016
Julius Probst
Globalization in history
2 big waves of globalization
Neoclassical models: Heckscher-
Ohlin
New economic geography
Is today different: The death of
distance?
Agglomeration effects
Rise of the service sector
2 nd
Industrial Revolution
2nd Industrial Revolution at the end of the 19th
century
Invention of several GPTs macroeconomic
impact on the global economy
Revolution in transport technology: steam power
steam ships and railroads
Significant decline in transportation costs: bigger
ships & time of transatlantic crossing reduced
Information flows faster as well: telegraph
higher market integration
The first wave of globalization:
1870 - 1920
Transport revolution: Millions of
Europeans migrating to the U.S. in
the end of the 19th century
The share of unskilled immigrants
increased with declining transport
costs
A large share increasingly came from
Southern & Eastern Europe
Time of free labor and
capital
Unlike today, labor movements were largely
unrestricted
Colonial world
Great Britain subsidized migration to Australia
New World countries initially did not have migration
restrictions
Large capital movements
UK had significant capital outflows to its colonies: large
international investment position (FDI)
A lot of international trade
The global economy was much more integrated by the
end of the 19th century than a few decades later
Facts on the first wave of
globalization
First wave of migrants to the U.S.
came predominantly from Northern
Europe & Scandinavia
Then Southern & Eastern Europe
Migration from the poor periphery
(Chinese railroad workers)
The U.S. received almost 20 million
migrants between 1890 and 1920
(>600.000 per year)
The big shocks of the 20th
century
Globalization is reversed
First World War 1914 1918
Great Depression: global economic
slump that lasted for years
U.S. was badly hit movement
towards protectionist policies around
the world: tariffs
2nd World War
Decolonization
2 nd
wave of gloablization
Globalization returned by the end of
the 20th century
Liberalization and rapid growth in
international capital flows and trade
However, no free movement of labor!
Exceptions: creation of the European
single market (EU)
Nevertheless, massive inflows to the
U.S.
France population (x 1.6)
U.S. population (x 4.2)
U.S. migrant flow
Immigrant share
Traditional trade theory
Heckscher-Ohlin model (2 Swedish
economists) neoclassical trade theory
Related to the idea of comparative
advantage (Ricardo): opportunity costs
Trade occurs because of different factor
endowments (K,L,)
The differing factor endowments are the
source of comparative advantage in the
Heckscher-Ohlin model
Heckscher Ohlin: 2
country case
2 countries with different factor endowments (K
and L)
Country 1: abundant capital (K/L is high) low
rental rate, high wages
Country 2: abundant labor (K/L is low) high
rental rate, low wages
A country will specialize in the production of the
good that uses its abundant and cheap factor of
production!
US specializes in car manufacturing, China in
textile manufacturing
What will happen with trade
Restrictive assumption: both countries face
the same commodity prices with trade,
produce both goods, use the same technology
As countries move from autarky to trade,
demand for the abundant factor of production
rises.
Factor prize equalization theorem: The prize of
factor inputs (r/w) will equalize across
countries.
US: falling wages, China: rising rental rate
Trade & Factor mobility
Factor mobility would also lead to an
equalization of factor prizes
Capital chases higher returns
Labor chases higher wages
Trade is a substitute for factor
mobility (free flows of capital and
labor)
New economic geography
Distance and geography did not play
a significant role in neoclassical
models
Hard to incorporate into formal
models!
Krugman was the main contributor of
new trade theory/new economic
geography (1980s and 1990s)
New features
Incorporation of trade costs
Multiple equilibria and path
dependence
Externalities
First- vs. second-nature geography
Size matters! Economies of scale
(manufacturing)
Gravitational pull: concentration of
industries
Thomas Friedman
New economy Internet based
Death of distance?
Companies like Facebook, Twitter
could theoretically produce from
anywhere?
But do they? Silicon Valley
Agglomeration effects
Agglomeration effects are becoming
more important
Over the last 2 decades, most GDP
growth in the U.S. was generated by a
few metropolitan areas
Tendency towards bigger cities, more
concentration
Much higher productivity in
concentrated areas
Swedens counties
Swedish regional GDP accounts
(Enflo et al.)

http://www.ekh.lu.se/en/research/economic-history-data/shra1860-2010
Agglomeration forces
Gravitational pull towards more concentration
Companies want thick labor markets
Companies want to be located close to
upstream/downstream suppliers & services
Externalities (spillover) between firms
ideas & technological know-how
Consumers demand amenities: education,
transportation, culture, gastronomie & other
services (love of variety)
Services are produced locally!
Forces of dispersion
High concentration
Overcrowding & congestion
Pollution
Rising housing prices and cost of
living in general
U.S. metropolitan areas
2/3 of U.S. residents in the top 100
metropolitan areas
12% of the nations landmass
3/4 of U.S. GDP
Cities with 150 000 inhabitants + generated
almost 85% of U.S. GDP growth in 2010
Source:
http://www.mckinsey.com/global-themes/urban
ization/us-cities-in-the-global-
economy
Large regional variation in growth
rates in the U.S. (BEA data)
U.S. metropolitan areas
(BEA data)
U.S. income growth by county
(BEA data)
U.S. cities by comparison
(McKinsey)

://www.mckinsey.com/global-themes/urbanization/us-cities-in-the-global-econom
The decline of manufacturing -
FRED data
U.S. employment
FRED data

Unemployment
rate

Linear
(Unemployment
rate)

Labor force
participation
The rise of the service
sector
The income elasticity for food is low,
but for services its high
Services often must be local
(gastronomy, transportation, leisure)
Agglomeration effects increase as we
consume more services
Now accounts for 80% of GDP, up
from 60% in 1945
Race against the machines?
True for manufacturing
For the economy as a whole, the
problem is largely exaggerated
U.S. has created millions of jobs in
the service industry over the last
decade
Unemployment very low
Concern: Stable manufacturing jobs
replaced with lower-paying service
sector occupations
Job trends in the U.S.
Employees in the U.S.: 145 million
Decline of manufacturing: down to 12 million now
from 17 million 2 decades ago
Rise of services in between 2004 and 2014:
professional business services, healthcare,
leisure and hospitality have created 3 million, 4
million and 2 million jobs, respectively
High-tech: less than 3% of the workforce (less
than 5 million in 2014)
Facebook only 14.000 employees, but higher
market capitalization than GM with 250.000
BLS employment projections

Source: http://www.bls.gov/news.release/pdf/ecopro.pdf
The new geography of jobs
(Moretti)
Moretti estimates that for every job
in high-tech, 5 local service sector
jobs are created
Uber drivers, Starbucks barristas,
Yoga instructors, etc.
Is the decline of industries
problematic?
Simply reflects structural change in
the economy
With higher income, we demand
more services
Problematic if stable manufacturing
jobs are replaced by low-paying
service occupations hollowing-out
of the middle class
Rising inequality growth inhibiting
Housing prices
Regulations and zoning laws
No bubble! its all about supply and
demand (and low global real interest
rates)
Agglomeration forces
U.S. housing prices

Source: http
://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-20
Some disagreement
Conditions are ripe for big city exodus
https://www.bloomberg.com/view/articles/2016-09-02/cond
itions-are-ripe-for-a-big-city-
exodus

Argument about substitution: from high-priced areas to


low-priced areas
Friedman: Outsourcing and offshoring to low-income
countries
Inequality on a global level

ce: Branko Milanovic, https://www.gc.cuny.edu/CUNY_GC/media/CUNY-Graduate-C


/Centers/LIS/Milanovic/papers/2013/WPS6719.pdf