Lumpy Countries, Urbanization, and Trade

Lumpiness of production factors within a country might overturn the predictions for the structure of trade by the factor-abundance (HO) model. Trade patterns, as predicted by this model, can both be magnified or reversed by uneven concentration of production factors within a country. Cities are the most characteristic manifestation of lumpiness of production factors and as a consequence different patterns of urbanization between countries might cause trade patterns to differ from HO predictions on the basis of the overall availability of production factors. We argue that urbanization indeed affects trade patterns. The consequence of this result is that urbanization should be included in empirical trade analysis; urbanization could, e.g. to the understanding of the ‘missing trade’ puzzle.Heckscher-Ohlin, factor endowments, agglomeration, geographical economics

Transfers, Non-Traded Goods, and Unemployment: An Analysis of the Keynes – Ohlin Debate

In the famous debate between Keynes and Ohlin on the transfer problem, the interaction between non-traded goods and unemployment complicates the analysis considerably. We analyze these issues using four different models to conclude that Keynes’s concern regarding the large burden imposed on Germany was justified. Simultaneously, we show that Ohlin’s presumption that a transfer does not affect the donor’s terms-of-trade either favourably or unfavourably was also justified. Moreover, Ohlin was also right in asserting that a transfer tends to lower the price of non-traded goods for the donor and raise them for the recipient.

It’s a Big World After All

Thomas Friedman’s book the world is flat has been a bestseller since it appeared in 2005. The remarkable success of the book reflects to a certain extent the present fears with respect to increasing globalization. Using many examples, Friedman argues that distance (however defined) is no longer a dominant characteristic of the world economy, or will cease to be so in the very near future. Competition is thought to be a race to the bottom, with the lowest-wage countries as the big winners. We disagree, and with us many other economists (see, for example, Leamer, 2006). Distance dominates all aspects of international trade and many stylized facts of international trade can only be understood by pointing towards the importance of distance. Furthermore, there is little evidence of income convergence. Using various methods and data sets, we show that many threats of global competition for the position of the traditionally developed (OECD) countries are unwarranted.income levels, convergence, trade, distance, leapfrogging

The Empirical Relevance of the New Economic Geography: Testing for a Spatial Wage Structure in Germany

In this paper we want to shed some light on the empirical relevance of the new economic geography. Using one of the central features of the core new economic geography models, namely that wages have the tendency to fall the further one moves away from centres of economic activity, we investigate the existence of a spatial wage structure for post-unification Germany. We find support for a spatial wage structure for German city-district wages, and hence indirectly for the relevance of a new economic geography model for Germany. We also find that demand linkages in Germany are strongly localised and that the “old” border still matters to the extent that economic interactions between western and eastern Germany are still limited compared to the situation within these two parts of Germany.New economic geography, spatial wage structure, Germany

Putting New Economic Geography to the Test: Free-ness of Trade and Agglomeration in the EU Regions

Based on a new economic geography (NEG) model by Puga (1999), we use the equilibrium wage equation to estimate two key structural model parameters for the NUTS II EU regions. These estimations enable us to come up with an empirically grounded free-ness of trade parameter. In line with NEG theory, the estimation results show that a spatial wage structure exists for the EU regions. By going back to the theoretical model we then analyze the implications of the free-ness of trade parameter for the degree of agglomeration. Our main findings suggest that agglomeration forces still have only a limited spatial reach in the EU. Agglomeration forces appear to be rather localized. At the same time, confronting our empirical results with the underlying new economic geography model also brings out the limitations of empirical research in new economic geography.

The strategic bombing of German cities during World War II and its impact on city growth

It is a stylized fact that city size distributions are rather stable over time. Explanations for city growth and the resulting city-size distributions fall into two broad groups. On the one hand there are theories that assume city growth to be a random process and this process can result in a stable city-size distribution. On the other hand there are theories that stress that city growth and the city-size distribution are driven by economically relevant differences between locations. These differences might be the result of physical differences or might be caused by location specific increasing returns or externalities. We construct a unique data set to analyze whether or not a large temporary shock had an impact on German city growth and city size distribution. Following recent work by Davis and Weinstein (2001) on Japan, we take the strategic bombing of German cities duringWWII as our example of such a shock. The goal of this paper is to analyze the impact of this shock on German city-growth and the resulting citysize distribution. If city-growth follows a random walk this would imply that the war shock had a permanent impact on German city-growth. If, however, as the second group of theories predicts, the random walk hypothesis is not confirmed this would mean that the war shock at most had a temporary effect on the city growth process. Our main finding is that city growth in western Germany did not follow a random walk, while city growth in eastern Germany did follow a random walk. Different post-war economic systems are most likely responsible for this outcome.

Putting new economic geography to the test: free-ness of trade and agglomeration in the EU regions

Based on a new economic geography model by Puga (1999), we use the equilibrium wage equation to estimate two key structural model parameters for the NUTS II EU regions. The estimation of these parameters enables us to come up with an empirically based free-ness of trade parameter. We then confront the empirically grounded free-ness of trade parameter with the theoretical relationship between this parameter and the degree of agglomeration. This is done for two versions of our model: one in which labor is immobile between regions, and one in which labor is mobile between regions. Overall, and in line with related studies, our main finding is that agglomeration forces still have only a limited geographical reach in the EU. Agglomeration forces appear to be rather localized

Cross-Border Mergers and Acquisitions: On Revealed Comparative Advantage and Merger Waves

By combining two large data sets (on international trade flows and on mergers and acquisitions – M&As), we are able to test two implications of Neary’s (2003, 2004a) recent theoretical work. Analyzing M&As in a General Oligopolistic Equilibrium (GOLE) model incorporating strategic interaction between firms in a general equilibrium setting, we argue that: (i) M&As follow revealed comparative advantage as measured by the Balassa index, and (ii) M&As come in waves. We find convincing support for both hypotheses, thus showing for the first time that there is an empirical connection between export performance and mergers and acquisitions.comparative advantage, cross border mergers and acquisitions, merger waves, general oligopolistic equilibrium model

Structural Change in OECD Comparative Advantage

In the post-war period, the goods composition of trade in OECD countries has changed considerably. We analyze the evolution of comparative advantage using a detailed trade data set and a new analytical tool: the harmonic (weighted) mass index, which enables us to identify periods of structural change. We then analyze which forces may be responsible for the main structural changes, which primarily took place in many OECD countries in the mid 1980s. We argue that neither the rise of China and India nor the deregulation programs in many OECD countries is likely to have been the main cause. Instead, the interaction between the real and monetary economy (possibly fuelled by nominal rigidities and delays in exchange rate pass through) as measured by the large swing in the real effective exchange rate of the dollar in the 1980s is our primary candidate. In view of similar recent large swings, we argue it is likely that the OECD countries will again go through substantial structural adjustments in the near future.Balassa-index, structural change, comparative advantage

Locational competition and agglomeration: the role of government spending

With the completion of EMU, tax competition and, more in general, locational competition is high on the EU policy agenda. In contrast to the standard neo-classical reasoning, recent advances in the theory of trade and location have shown that tax competition does not necessarily lead to a ‘race to the bottom’. In these recent discussions the relevance of government spending as an instrument for locational competition is unduly neglected. We therefore introduce a more elaborate government sector in a geographical economics model by analyzing government spending and government production. By changing the relative size, direction or efficiency of the production of public goods, our simulation results show that governments can change the equilibrium between agglomerating and spreading forces. In addition, we show analytically that the introduction of public goods fosters agglomeration. Ultimately, our paper shows that by restricting attention to taxes, one ignores that government spending also determines the attractiveness of a country as a location for the mobile factors of production.