Trade and Interdependence in a Spatially Complex World
AbstractThis paper presents an analytic solution framework applicable to a wide variety of general equilibrium international trade models, including those of Krugman (1980), Eaton and Kortum (2002), Anderson and van Wincoop (2003), and Melitz (2003), in multi-location cases. For asymptotically power-law trade costs and in the large-space limit, it is shown that there are parameter thresholds where the qualitative behavior of the model economy changes. In the case of the Krugman (1980) model, the relevant parameter is closely related to the elasticity of substitution between different varieties of goods. The geographic reach of economic shocks changes fundamentally when the elasticity crosses a critical threshold: below this point shocks are felt even at long distances, while above it they remain local. The value of the threshold depends on the approximate dimensionality of the spatial configuration. This paper bridges the gap between empirical work on international and intranational trade, which frequently uses data sets involving large numbers of locations, and the theoretical literature, which has analytically examined solutions to the relevant models with realistic trade costs only for the case of very few locations.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 874.
Date of creation: 2013
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-02 (All new papers)
- NEP-GEO-2014-02-02 (Economic Geography)
- NEP-INT-2014-02-02 (International Trade)
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