Localization of Industry and Trade Performance
This paper reviews recent literature on the spatial agglomeration of economic activity. This literature provides new ways of thinking about the determinants of the location of production, of trade flows, and of international income differences. Agglomeration of activity arises out of the tension between product-market and factor-market competition - which encourage a dispersed pattern of location - and externalities between firms (technological or pecuniary) which promote agglomeration. Using a framework in which intermediate goods create forward and backward linkages, the paper shows how economic integration may cause agglomeration, and then discusses the implications of this for real income and for economic policy. Copyright 1996 by Oxford University Press.
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