FINANCING CITIES IN THE GLOBAL ECONOMY INVIDUAL STUDIES AND PREPARATION

IHS-LGE ASSIGNMENT, May 10, 2005GROUP 21-LUIZ GUSTAVO PACKER HINTZ2-RUIWEN KONG3-AHMED AL-RUBEA

CHAPTER 6: Refinement and extentions

Geneal overview : The chapter gives a broad overview of

three different types of extentions • Type 1 extentions: concern transport

cost and the way “space” is handled • Type 2 extentions: focus on the

production side.• Type 3 extentions: stresses the role of

dynamics and expectation in geographical economics .

Type 1 extentions : Non-natural space and transport costs

• Neutrality of space means no location is preferred initially over other locations agglomeration.

• Some locations are preferred by nature or man-made phenomena over other locations natural centers of economic activities.

• Explanations (a) space and history (b) transport cost

•

a) SPACE AND HISTORY

• Geography development of the countries (e.g. climate)

• Geography development process (e.g. GDP per capita differences between rich and poor countries

CONCLUSIONS:

• Tropical and landlocked regions are geographically hindered in development

• Coastal regions and/or regions linked to the coast by navigable waterway are strongly favored in development

• Access to water ways easy access to foriegn or overseas markets copmaratives advantages (e.g. cliamatic conditions, naturel resources, production factors within the boarders)

Type 1 extentions : Non-natural space and transport costs

• Space Non-neutral •Space Linear in each region activities take place between the river and mountain range • Space One-dimentional, homogeneous, and unbounded • First Model:• Two regions, one on each side of the river, the quality of land is the same and is not mobile, non-land production factors are freely mobile• Labor is the only mobile production factor and each • Workers can change job and location, regions are identical and the reason for a cluster of activities increasing returns in production, transport costs, market-size effects, and competition effects .

Example Non-neutral Space

RIVER

City 1l

Economic Distance to Farmland Econ. Dist. to Harbor

MOUNTAINS

MOUNTAINSl

b

Economic Distance Across Riverc

Harbor

Farmland

Food ImmobileCity 2

Economic Distance to Farmland

Farmland

Food Immobile

7Type 1 extentions : Non-natural space and transport costs

• Suppose that ,because of some initial favorable conditions a cluster of activity has emerged in city no. 1 .

• This city specilizes in manufacturing goods and export manufacturers in exchange for land -intensive imports from both side of city 1 .

• There are two natural harbors ,one at (b) and one in 2 ,the economic distance between the two regions is C

• now assume that region 1 grows ,this will result in a larger city because agglomeration of manufactured goods productions is benificial ,more varieties will be produced ,this will creates larger market and more agglomeration.

• As the population grows ,more farmland will be occupied in order to meet the increasing in the food demands ,

• eventually,developmentof farmland in region 2 becomes attractives if the economic distance between region 2 and the city is smaller than the distance from the” marginal” farmland in region 1 to the city

Example Grids of Locations in Geographical Space

1

A B

C D

E

F

LAND

SEA

1

1

1

1

11 1

1

1

1 1

1

1

22

2

2

2

Type 1 extentions : Non-natural space and transport costs(b) Transport cost:- An experiment with non-neutral space :the stelder approach• Stelder (1998) has implemented the basic model of krugman (1991) on

non neutral spaces that defined as a grid of N locations and a two -dimensional surface .the distance between two locations is calculated as the shortest path.

• As it shown in the figure (2) each location on the grid is connected with its direct horizontal and vertical neighbors with distance 1 and with its diagonal neighbors with distance #2

• Assuming no transport across the sea or along the coast ,transportation from A to F in the figure 2 would take the route C+D+E .

• Fundamental changes atise if we introduce transport costs for food ,the good with the immobile structure ,because transport cost has two effects .first : the region that import food has a higher wages ,say in region 1 ,wages in food will be T times higher than in region 2 ,where the iceberg transport cost for food,this effects increases the income level in region 1 making it more attractive.

• Second : the prices index also increases ,because the cost of the living in the region 1 increases as a result of the costly import of food

•

Type II extensions :production structure and geography

• This type of extensions focus on the production structure that is simply using only labor as a factor of production with perfect competition ,and constant return to scale in the food sector ,and monopolistic competition with increasing return to scale based on the fixed cost in the manufacturing sector .There are three versions of type II extesions

• version 1 : modifies the production function in the manufacturing sector .

• Version 2: of type II extensions introduces interactions in the manufacturing production process .

• Version 3 : allows for more sophisticated firm behavior,with more stage in dicision process and possibly more strategic considerations

Type II extensions :production structure and geography

•A simple example of version 1 changing the production function for manufactures ,and hence the cost function provided by Brakman(1996) arguing that negative feedbacks in the economy ,such as the costs of congestion,may be a rationale for the viability of small economic centers.•There are increasing return to scale at the firm level resulting from the fixed labor costs,and marginal labor costs ,these cost may vary between regions in particular according to the number of manufacturing producers are located in the region.

•Basiclly two main factors determine the evolution of the economy and the determination of a specific long-run equilibrium. First : is history which can be decisve and very broad sense ,and can imply differences ,for example taste,technology,or factor endowments. Second: expectations may be the most important force determining which specfic long-run equilibrium get established.*expectition become particularly important if one takes future earnings into consideration when making decision .

Type III extensions : the burden of history and the role of expectations

the existence of multiple equilibria is one of the prominent characteristics of the geographical economics approach,the reasons are to be found in the non-liner nature of the equilibrium equations,which are based on the pecuniary externalities,internal economies of scale, imperfect competition,and love of variety.

conclutions

• The core model of geographical economics has been extended and improved upon in a number of intersting directions sence it was developed by krugman in 1991

• Changes in, and extensions of ,the core model usually focus on characterstics that can be adapted to better describe stylized facts,or shed new lights on familiar problems.

• Afew important building blockes of the core model have hardly been touched, such as firm-specific economies of scale ,imperfect competition, pecuniary externalities,and the Dixit-Stiglitz monopolistics competition framework with its associated love of variety effect.

•

Conclusion

• Three main types of extensions were discussed some examples of each type.

• Type I extensions concern transports cost and the modleing of non-neutral space.

• Type II extensions adapt and enirch the production structure of the model ,where we identified three different versions ,focusing on the production function,interactions in productions ,and firm behavior respectively.

• Type III extensions analyze the role of dynamics and expectations in geographical economies .