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ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS FINANCING CITIES IN THE GLOBAL ECONOMY LOCATION AND GEOGRAPHICAL ECONOMICS Presentation Chapter 5 Liga Mieze Denis Assimwe Kangere Bizuneh Gultu Lakew Camilo Mendoza May 2005 IHS- Rotterdam ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS Introduction • Target – to asses the empirical relevance of geographical economics – testing the models • The main topics – concentration, specialisation and agglomeration – Economic theories – Home-market effect and spatial wage structure – conclusions ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS Distinguishing among concentration and agglomeration What they have common? Both deal with the location of economic activities What is the difference? • Concentration – analyzes the location across space of a few well-defined sectors (notable in industry) • Agglomeration – analyzes the location across space of a much larger part of activity (manufacturing sector as whole) ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS Distinguishing speciali. from concent. & agglom. • Specialisation means concentration of activity in one specific field ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS Different levels of concent., agglom. & special. Neither specialisation nor concentration Specialisation;concentration at regional level Specialisation;concentration at contry level Specialisation;concentration and aglomeration at contry level ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS Location • Firms tend to locate in or near regions where demand is relatively high (reinforcing a process of agglomeration) • Regions with a relatively high GDP per capita tend to be located close to each other, as do regions with low levels of GDP per capita. New approach within countries – urban area or cities are regions in national space ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS How to measure? Elison-Glaeser index measures the degree of geograpchical concentration to which industry i is geographically concentrated (in terms of employment) in location s at time t. ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS How to measure? • Krugman specialization index – definied as the absolute value of a country’s (in case of EU) share in the production of industry k minus the share of other (EU) countries in the production k, summed over all industries. IF k=0 the country have industrial structure that is identical to the rest of EU ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS How to measure? Ireland Greece Finland Denmark Portugal Netherlands Sweden 1994-1997 Average 1980-1983 Belgium 1970-1973 Italy Germany Austria Spain UK France 0 0,2 0,4 Krugman specialization index in the EU 0,6 0,8 ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS How to measure? • Agglomeration in case of EU manufacturing can be measured by using a country’s share in total EU manufacturing activity. • Concentration is measured as the relative production share across countries for a given industry ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS How to measure? Germany France Italy UK Spain Netherlands Belgium 1994-1997 Sweden 1970-1973 Austria Finland Denmark Portugal Ireland Greece 0 10 20 Agglomeration of manufacturing in the EU 30 ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS Economic theories • Glaeser theory: – can be explained by neo-classical model • Ellison and Glaeser: – Natural advantages of location (first nature) or location of spill-overs (second-nature) ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS The Home-market effect • New trade models without transport costs imply that trade leads to specialization (neo-classical trade model). • Home-market effect: if local high demand for cars, then it will export cars. THEN LOCAL DEMAND More than proportional PRODUCTION EXPORT ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS The Home-market effect • Idiosyncratic changes matters? • Davis and Weinstein: the output of a good g in a certain industry n in a certain country r is proportional to the IDIOsyncratic DEMand ~ • IDIODEM: difference between the demand for good g in the industry n in country r, and the demand for that good in the rest of the countries. • IDIODEM represents home-market effect. ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS A spatial wage structure • Increasing of production, because of increasing of demand (within a region) depends on the elasticity of labor supply. • When labor supply is not elastic the increased demand lead to an increase in the production AND to higher wages in that region. WAGES ECONOMIC CORE ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS A spatial wage structure Mexicali Ciudad Juarez Chihuahua Torreon Monterrey Mexico Tampico Leon Guadalajara Mexico City Puebla Veracruz Acapulco There are differences in GDP between North and South of Mexico Merida ROTTERDAM - 2005 FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICS Conclusions • The variables aren’t independent • Without knowledge of initial conditions is difficult to test the model • Geographical concentration of industries is the rule • Home-market effect and existence of a spatial wage structure are confirmed. • Unclear what geographical economics adds empirically to the understanding of the relationships between location and economic activity.