Precursors of the NEG theories Flashcards
What is the NEG?
Theory to explain location decisions
Classifications of other location theories
Urban economics:
- monocentric city model (von Thünen)
- Henderson model
Regional economics:
- central place theory (Christaller and Lösch)
- market potential (Harris)
Neo-classical trade theory (NCT):
- inter-industrial trade: factor-proportions theory (Ricardo and Heckscher-Ohlin)
New trade theory (NTT):
- intra-industry trade (Dixit-Stiglitz)
- home-market effect (Krugman)
- Krugman-Venables
Monocentric city model
Developed by von Thünen (1826):
- A plain with one single city
- Positive transport costs; 3 crops: flowers, vegetables, grain
- > trade-off between cost of land and transport cost (Bid-rent curve)
Shortcomings:
- no increasing returns to scale
- no interaction between cities
- take existing of a city as exogeneously given
Henderson Model
Developed by Henderson (1974):
- Internal vs. External returns to scale
- internal RS: on firm level: the bigger the size of firm, the lower the average cost
- external RS: on industry level: the bigger the size of industry, the lower the average cost
- > Positive external scale effects; Marshallian externalities: spillover of knowledge, labour market pooling, specialised suppliers
- > Negative external scale effects: e.g. congestion
Shortcomings:
- no transport costs
- no hinterland
Utility of representative resident as a function of city size
- cities are specialised in one or a few industries
- city size depends on the degree of externalities (differing largely between industries)
Central place theory
Developed by Christaller (1993) and Lösch (1940):
- explain location of cities based on functions they perform/ type of goods they produce
- IRS and transport costs
Shortcomings:
- no economic foundation for location decisions
- no imperfect competition
- more a descriptive than a causal mode
Market potential theory
Developed by Harris (1954):
- market potential is high in regions where production takes place; not only supply important, but also demand
Shortcomings:
- no theoretical foundation: conclusions are based on actions and interactions of economic agents
MP = Market potential; M = demand; D = Distance; j = other country
Inter-industrial trade theory
Factor-proportions theory (Heckscher-Ohlin) with comparative advantage (first-nature theory) (Ricardo):
- 2 goods, 2 factors of production, 2 countries
- no transport costs
- perfect competition (CRS)
Shortcomings:
- differences in factor availability cannot explain core-periphery, only specialisation (first-nature)
- trade cannot lead to unequal division of economic activity (agglomeration in one location)
New trade theory - Intra-industry trade (Dixit-Stiglitz, Krugman)
IRS at firm level are relevant: intra industry trade:
- love-of-variety effect
- opening up markets results in lower prices and less varieties in total (but more varieties in each country separately)
Shortcomings:
- no transport costs
- market size equally distributed; undetermined which varieties will be produced where (geographical aspect missing)
Lock-in effect with external IRS
New trade theory - Home-market effect (Krugman)
Firms want to locate in regions with lots of domestic consumers/customers.
Lock-in effect
If country B wanted to start a production of a good, it would need to start on a higher average cost than country A is producing the good already (i.e., making loss).
- > Country B will not enter the market
- > external increasing returns to scale
- > lock-in effect
New trade theory - Krugman and Venables
Model allows countries to differ in size of production factors/market shares:
- two sectors: 1 CRS, 1 IRS
- transport costs
- firms and workers mobile within countries (between sectors, entry and exit), not between countries
Shortcomings:
- existence of core and periphery not deducted from model itself
- firms and workers are immobile between countries
