DP4441 Economic Integration and Agglomeration in a Middle Product Economy

Author(s): Shin-Kun Peng , Jacques-François Thisse , Ping Wang

Publication Date: August 2004

Keyword(s): economic integration , agglomeration , intermediate goods trade , growth

JEL(s): D90 , F15 , O41 , R13

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP4441.asp

The Paper examines the interactions between economic integration and population agglomeration in a middle product economy displaying neoclassical growth. There are two vertically-integrated economies. Each consists of a large number of final good competitive firms operating plants in both regions, and a large number of intermediate goods monopolistically competitive firms operating each in only one region. While immobile workers are employed with intermediate goods to produce the final good, mobile workers are used to design the line of differentiated intermediate good inputs. Capital is immobile and the final good is non-traded, whereas the intermediate goods are traded. We find that employment agglomeration and output growth need not be positively related. Furthermore, trade is not necessarily beneficial to regional growth, whereas trade between the two regions need not be associated with a widened skilled-unskilled wage gap.