DP886 Integration, Specialization and Adjustment

Author(s): Paul Krugman , Anthony J. Venables

Publication Date: December 1993

Keyword(s): Agglomeration , Industrial Location , Integration

JEL(s): F1 , F12 , F15 , R3

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP886.asp

The paper considers the equilibrium location of two industries in two countries. Both industries are imperfectly competitive and produce goods which are used in final consumption and as intermediates by firms in the same industry. Intermediate usage creates cost and demand linkages between firms and a tendency for agglomeration of each industry. When trade barriers are high the equilibrium involves division of both industries between both locations in order to meet the final demands of consumers. At lower trade barriers agglomeration forces dominate and the equilibrium involves specialization, with each industry concentrated in a single location. Economic integration may induce specialization. The paper studies the simple dynamics of the model and demonstrates that during the adjustment process a sizeable proportion of the labour force may suffer lower real wages as relocation of industry occurs, although there are long-run gains from integration.