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PAUL KRUGMAN
Massachusetts Institute of Technology
Since 1990 a new genre of research, often described as the new economic geography, has emerged. It
differs from traditional work in economic geography mainly in adopting a modelling strategy that exploits
the same technical tricks that have played such a large role in the new trade and new growth theories;
these modelling tricks, while they preclude any claims of generality, do allow the construction of models
thatunlike most traditional spatial analysisare fully general-equilibrium and clearly derive aggregate
behaviour from individual maximization. The new work is highly suggestive, particularly in indicating how
historical accident can shape economic geography, and how gradual changes in underlying parameters
can produce discontinuous change in spatial structure. It also serves the important purpose of placing
geographical analysis squarely in the economic mainstream.
I. INTRODUCTION
The study of spatial economicsof the location of
productionhas a long if somewhat thin history.
Von Thnens (1826) analysis of land rent and use
around an isolated city was roughly contemporaneous with Ricardos statement of comparative advantage; the location analysis of Weber (1909), the
central-place theory of Christaller (1933) and Lsch
(1940), the regional science of Isard (1956), and the
urban systems theory of Henderson (1974) are all
old and well-established ideas.
1998 OXFORD UNIVERSITY PRESS AND THE OXFORD REVIEW OF ECONOMIC POLICY LIMITED
Table 1
Forces Affecting Geographical Concentration
Centripetal forces
Centrifugal forces
Immobile factors
Land rents
Pure external diseconomies
P. Krugman
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of economic geography would be substantially complicated by the need to model the transportation as
well as the goods-producing sectors. Worse yet,
transportation costs can undermine the constantdemand elasticity that is one of the crucial simplifying assumptions of the DixitStiglitz model. Both
problems can be sidestepped with an assumption
first introduced by Paul Samuelson (1954) in international trade theory: that a fraction of any good
shipped simply melts away in transit, so that
transport costs are in effect incurred in the good
shipped. (In the new geography models, melting is
usually assumed to take place at a constant rate per
distance coverede.g. 1 per cent of the cargo
melts away per mile.) In terms of modelling convenience, there turns out to be a spectacular synergy
between DixitStiglitz market structure and iceberg transport costs: not only can one avoid the
need to model an additional industry, but because the
transport cost between any two locations is always
a constant fraction of the free-on-board price, the
constant elasticity of demand is preserved.
Evolution
Interesting stories about economic geography often
seem to imply multiple equilibria. Suppose, for example, that producers want to locate where other
producers choose to locate; this immediately suggests some arbitrariness about where they actually
end up. But which equilibrium does the economy
select? New economic geography models typically
assume an ad-hoc process of adjustment in which
factors of production move gradually toward locations that offer higher current real returns. This sort
of dynamic process was initially proposed apologetically, since it neglects the role of expectations.
But it is possible to regard models of geography as
games in which actors choose locations rather than
strategiesor rather in which locations are strategiesin which case one is engaged not in oldfashioned static expectations analysis but rather in
state-of-the-art evolutionary game theory! (To middlebrow modellers like myself, it sometimes seems
that the main contribution of evolutionary game
theory has been to re-legitimize those little arrows
we always wanted to draw on our diagrams.)
The computer
Finally, despite the best efforts of the theorist, all but
the simplest models of economic geography usually
turn out to be a bit beyond the reach of paper-andpencil analysis. As a result, the genre relies to an
unusual extent on numerical exampleson the
exploration of models using both static calculations
and dynamic simulations.
(iv) Dynamics of Geographical Change
Suppose that, for some reason, some economic
activity has a slightly larger initial concentration in
one location than in another. Will that concentration
be self-reinforcing, with a growing disparity between
the locations, or will they tend back toward a symmetric state? The answer presumably depends on the
relative strength of centripetal and centrifugal forces.
Suppose, on the other hand, that a concentration of
economic activity already exists, but that some of
that activity for some reason moves elsewhere. Will
the activity move back, or will the concentration
unravel? The answer to this question similarly depends on the relative strength of centripetal and
centrifugal forces.
As these generic questions suggest, models of
economic geography will typically exhibit a pattern
in which the qualitative behaviour of the model
changes abruptly when the quantitative balance of
forces passes some critical level. That is, the models
are characterized by bifurcations. And bifurcation
diagrams are therefore a central analytical tool in
this literature.
The typical form of these bifurcations may be
illustrated by Figure 1, which summarizes the dynamics implied by the model originally introduced in
Krugman (1991). That paper was, in effect, an
attempt to formalize the story suggested by Harris
and Pred. The model envisaged an economy consisting of two symmetric regions with two industries:
immobile, perfectly competitive agriculture and
mobile, imperfectly competitive (DixitStiglitz) manufacturing. The backward and forward linkages in
manufacturing generate centripetal forces; the pull
of the immobile farmers the centrifugal force.
In that model, the difference in real wages between
regions depends on the allocation of manufacturing
between those regionsbut the nature of that
dependence in turn depends on the parameters of
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Figure 1
Region 1 share of
manufacturing
A
B
Transport
cost
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the components of that series as growing independentlyand of the distribution becoming increasingly
dominated by a fluctuation at some preferred frequency that depends on the parameters of the
model, but not on the initial conditions. And it is this
preferred frequency that determines the eventual
number of agglomerations that emerge. (This is only
one example of the tantalizing affinity that one often
finds between the new economic geography and
fashionable scientific trends such as complexity
theory.)
An alternative way to go beyond two-region modelling is to use the new economic geography to revisit
some of the questions of traditional location theory.
In a series of papers, Masahisa Fujita and his
students have in essence tried to take the German
tradition of urban modelling that began with von
Thnen and give it a true microeconomic foundation. (In Fujitas models all labour is mobile; thus the
location of agriculture as well as manufacturing is
endogenous.) In Fujita and Krugman (1995) a version of the original von Thnen model is offered in
which the existence of a central city is no longer
simply assumed: instead, manufacturing concentrates in the city because of the forward and backward linkages generated by that very concentration.
Or, looking at the issue another way, the concentration of economic mass at the city generates a selfvalidating cusp at that point in the market potential
function that determines where manufacturing locates. Agriculture is then spread around that centre,
with land rents declining to zero at the agricultural
frontier. Such a monocentric equilibrium, however,
turns out to be sustainable only if the population is
sufficiently small. Fujita and Mori (1996a) take the
same basic model, but envision a gradually rising
population which leads to the periodic emergence of
new cities in a long, narrow economy that gradually spreads along a line; the resulting multi-city
spatial economy may be regarded as a (one-dimensional) version of Lschs central place theory.
(Nobody has yet managed to produce a model with
Lschs famous hexagonal market areas.) Fujita et
al. (1997) consider an economy with multiple manufacturing industries, differing in transport costs and/
or scale economies; such an economy spontaneously develops a system of central places that finally
provides a justification (again in only one dimension)
for Christallers (1933) hierarchical model of central places. Finally, Fujita and Mori (1996b) address
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