agglomeration facts and theories about agglomeration

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Agglomeration Facts and theories about agglomeration Slide 2 Agglomeration Concentration of economic activity Core and periphery Economic development is unevenly distributed in space Should we worry about agglomeration? Slide 3 Agglomeration http://www.savethenight.eu/Lights in Europe.html http://www.savethenight.eu/Lights in Europe.html Slide 4 Agglomeration Concentration of economic activity is associated with strong disparities in income per capita Income per capita is a good proxy for standard of living and people well being Large disparities in income per capita in Europe at national level Slide 5 National GDP per capita in PPS 2010 Slide 6 Agglomeration There are important differences within the advanced and the backward countries Agglomeration of economic activity does not coincide with national boundaries In Europe important gaps in income per capita at regional and at sub regional level The territorial shape of unbalances is different in each country Slide 7 Regional GDP per capita in PPS - 2010 Slide 8 Agglomeration Differences in income per capita are often associated with differences in the variables related to the labour market Low income per capita countries are often countries with higher rates of unemployment, and of lower rates of employment Slide 9 Unemployment rate - 2010 Slide 10 Unemployment rate 2010, age group 15-64 Slide 11 Employment rate of the age group 20-64 - 2012 Slide 12 Agglomeration And low per capita income regions are often regions with lower rates of employment and higher rates of unemployment Slide 13 Employment rate of the age group 20-64 - 2012 Slide 14 Unemployment rate - 2010 Slide 15 Unemployment rate 2010, age group 15-64 Slide 16 Agglomeration But keep in mind that this relation is far from being perfect because Labour markets have strong national specificities due to the national institutional context and regulations and because ... the employment content of economic growth can vary Slide 17 Agglomeration Spatial unbalances in economic activity are also associated with unbalances in the endowment or availability of other important public goods (again with important exceptions) which affect the well being of people Yes, there are good reasons why we should worry about agglomeration Slide 18 Agglomeration Is there any long run tendency towards convergence of levels of income per capita? It is difficult to answer. At global level and in the long run the answer is probably positive. Look at the video which shows the long run correlation between health and GDP per capita at global level. Slide 19 Agglomeration Lecture by Hans Rosling Slide 20 Agglomeration At European level, a tendency towards convergence after the second world war can be detected at national level Looking at the last decade, some backward European countries have grown very fast and narrowed dramatically the gap with the advanced countries Slide 21 Agglomeration Growth however in these countries has often been spatially very unbalanced Backward regions in the backward countries have grown more than all regions in advanced countries but much less than advanced regions of their own countries Slide 22 Agglomeration The impact of the present economic crisis has been felt by all countries However it hit different countries in different ways It is very difficult to forecast how and when the various countries will emerge from the present crisis Slide 23 Real GDP growth rate - % change on previous year geo\time00-072007200820092010201120122013 EU (27 countries)17,003,20,3-4,52,0 1,7-0,4 United States17,981,9-0,3-2,83,01,82,81,9 Belgium14,672,91-2,82,31,80,1 Bulgaria49,516,46,2-5,50,41,80,8 Czech Republic39,715,73,1-4,72,51,8-1,0 Denmark12,411,6-0,8-5,81,41,1-0,4 Germany10,983,31,1-5,14,03,30,70,4 Estonia72,087,5-3,7-14,32,69,63,9 Ireland44,245,2-3-7-1,12,20,2 Greece35,343-0,2-3,3-4,9-7,1-6,4 Spain29,273,50,9-3,7-0,20,1-1,6 France14,872,3-0,1-2,71,72,00,0 Italy10,331,7-1,2-5,11,50,5-2,5 Cyprus31,835,13,6-1,91,30,4-2,4 Latvia92,189,6-3,3-17,7-1,35,35,2 Slide 24 Real GDP growth rate - % change on previous year geo\time00-072007200820092010201120122013 EU (27 countries)17,003,20,3-4,52,01,7-0,4 United States17,981,9-0,3-2,83,01,82,81,9 Lithuania56,69,82,9-14,81,66,03,7 Luxembourg29,56,60,8-5,33,11,9-0,2 Hungary24,90,10,9-6,81,11,6-1,7 Malta11,74,3 -2,63,31,70,9 Netherlands13,83,91,8-3,51,50,9-1,2 Austria15,93,71,4-3,81,82,80,9 Poland28,46,85,11,63,94,51,9 Portugal8,12,40-2,91,9-1,3-3,2 Romania42,96,37,3-6,6-1,12,20,7 Slovenia30,76,93,6-81,30,7-2,5 Slovakia43,510,55,9-4,94,43,01,8 Finland22,85,31-8,23,42,8-1,0 Sweden21,13,3-0,6-5,26,62,90,9 United Kingdom20,53,5-1,1-4,41,71,10,31,9 Slide 25 Regional GDP change between 2000 and 2008 Slide 26 Regional GDP change between 2000 and 2007 Slide 27 Agglomeration There are various theories to explain why economic development produces inherently spatial economic unbalances One of the most recent and debated theories is the New Economic Geography The first contribution of this school of thought is due to Paul Krugman in 1991 Slide 28 Agglomeration The issue of the Neg is to explain the formation of a large variety of economic agglomerations in the geographical space The novelty of the Neg is to explain agglomeration within a framework of general economic equilibrium, that is to explain agglomeration and dispersion within the same model Slide 29 Agglomeration The model analyses simultaneously the centripetal and the centrifugal forces of economic activity Three key hypotheses of the model: positive transport costs increasing returns to scale and monopolistic competition factor mobility Slide 30 Agglomeration The Neg shows that the interaction between economies of scale, transport costs and factor mobility may produce concentration of economic activity The higher are increasing returns to scale, the lower transports costs and the higher the share of mobile factors of production, the higher the probability of agglomeration Slide 31 Agglomeration The model is circular: once the process of agglomeration has started, it tends to reproduce and to reinforce The sketch of the model The firm must decide where to localize its plant on the basis of three parameters: fixed cost of setting a new plant, transport cost and share of immobile resources Slide 32 Agglomeration Basic assumptions Two regions: East and West Two sectors: agriculture and manufacturing Firms and workers in the agriculture sectors cannot move Firms and workers in the manufacturing sector can move Slide 33 Agglomeration Manufactured goods can be produced in either or both locations There is a positive set up cost for each manufacturing plant If a manufactured good is produced in only one location, trade costs must be incurred to serve the other market Slide 34 Agglomeration If a manufactured good is produced in two locations, the set up cost doubles Slide 35 Agglomeration A numerical example Slide 36 Krugman Assumptions Manufacturing labour force in each location is proportional to the share of manufacturing of that location Demand is strictly proportional to the labour force Total demand for manufacturing is 10 Labour force in agriculture 60%, in manufacturing 40% Slide 37 Krugman Therefore total demand for manufacturing is 10 of which 6 from workers in agriculture (always 3 for each location) and 4 from manufacturing workers (from either or both locations) The cost of transport per unit of production (t) is 1 The set up cost is 4 for each plant Slide 38 Krugman Distribution of manufacturing employment Cost of typical firm if it produces in East East Both Both West West East only Fixed 484 Transportation 307 Total 7811 Fifty-fifty split Fixed 484 Transportation 505 Total 989 West only Fixed 484 Transportation 703 F=4 t=1 %40 Total 1187 Slide 39 Krugman Distribution of manufacturing employment Cost of typical firm if it produces in East East Both Both West West East only Fixed 6126 Transportation 307 Total 91213 Fifty-fifty split Fixed 6126 Transportation 505 Total 111211 West only Fixed 6126 Transportation 703 F=6 t=1 %40 Total 13129 Slide 40 Krugman Distribution of manufacturing employment Cost of typical firm if it produces in East East Both Both West West East only Fixed 484 Transportation 4.5010,5 Total 8,5814,5 Fifty-fifty split Fixed 484 Transportation 7,50 Total 11,58 West only Fixed 484 Transportation 10,504,5 F=4 t=1,5 %40 Total 14,588,5 Slide 41 Krugman Distribution of manufacturing employment Cost of typical firm if it produces in East East Both Both West West East only Fixed 484 Transportation 4,505,5 Total 8,589,5 Fifty-fifty split Fixed 484 Transportation 505 Total 989 West only Fixed 484 Transportation 5,504,5 F=4 t=1 %10 Total 9,588,5 Slide 42 Agglomeration Main conclusions of the model The choice of location of a firm will depend on the location of other firms Other things being equal, the firm has the convenience to locate in the bigger market to exploit increasing returns and save transport costs. Slide 43 Agglomeration The choice of the firm to locate in the bigger market, will make that market bigger, and a bigger market will attract new firms starting a circular process towards the concentration. Slide 44 Agglomeration Agglomeration is only a possibility. Whether agglomeration will take place or not depends on the relative values of transport costs, fixed costs, share of immobile population. High transport costs and an high share of immobile population are an obstacle for agglomeration while high fixed costs are an incentive for agglomeration Slide 45 Agglomeration There are then multiple equilibria. You can find equilibrium producing manufacturing entirely in West, entirely at East or with two plants both at west and at east Slide 46 Agglomeration You can also appreciate that when t=0 (no transport cost) the solution of one plant is always convenient. The world is flat. Spatial distance is irrelevant and

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