Increasing Returns and Economic Geography

35 Pages Posted: 26 May 2004 Last revised: 15 Dec 2022

See all articles by Paul R. Krugman

Paul R. Krugman

Princeton University - Princeton School of Public and International Affairs; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: March 1990

Abstract

This paper develops a two-region, two-sector general equilibriun model of location. The location of agricultural production is fixed, but ionopolistcally competitive manufacturing finns choose their location to maximize profits. If transportation costs are high, returns to scale weak, and the share of spending on manufactured goods low, the incentive to produce close to the market leads to an equal division of manufacturing between the regions. With lower transport costs, stronger scale economies, or a higher manufacturing share, circular causation sets in: the more manufacturing is located in one region, the larger that region's share of demand, and this provides an incentive to locate still more manufacturing there. Thus when the parameters of the economy lie even slightly on one side of a critical "phase boundary", all manufacturing production ends up concentrated in only one region.

Suggested Citation

Krugman, Paul R., Increasing Returns and Economic Geography (March 1990). NBER Working Paper No. w3275, Available at SSRN: https://ssrn.com/abstract=453812

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