Locational Disadvantage and Losses from Trade : Three Regions in Economic Geography

Abstract

We show that how spatial evolution is different between the two representative models of economic geography: Krugman (1991 JPE) and Ottaviano et al. (2002 IER). We analyze the impacts of falling transport costs on the spatial distribution of economic activities and welfare for three regions located on a line. In the former model, the central region always has locational advantage and manufacturing workers gain from trade. In the latter model, however, the opposite is true when markets are opened up to trade. This is because the price competition is so keen in the central region that manufacturing sector moves to the peripheral regions, which aggravates the social welfare. We then show that when goods are close substitutes and share of manufacturing is of an intermediate level, the manufacturing activities completely disappears from the central region leading to a full agglomeration in one peripheral region.