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Heckscher-Ohlin and Agglomeration

New Economic Geography (NEG) models are difficult to confront with the data, since "on the one hand, they generally emphasise the unleashing of agglomeration forces after trade liberalisation, but on the other hand, they also accomodate multiple equilibria and non-monotonicity" (Brülhart, 1998a). In this paper, we show that once factor proportions are fully taken into account in a standard NEG model, the indeterminacy arising from multiple equilibria becomes less severe, and non-monotonicy arises as the most general implication of this literature. We further show that, although trade integration among similar countries ultimately leads to factor price equalisation, agglomeration economies imply an overshooting of relative factor prices with respect to their free trade level in the process of economic integration. Finally, we show that the joint interaction of factor proportions and agglomeration economies may help explain the simultaneous rise in production specialisation and fall in trade specialisation experienced by most European countries in the last decades.

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Paper provided by KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy in its series KITeS Working Papers with number 126.

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Length: 31 pages
Date of creation: Mar 2001
Date of revision: Dec 2001
Handle: RePEc:cri:cespri:wp126
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  14. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
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  20. Epifani, Paolo, 2005. "Heckscher-Ohlin and agglomeration," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 645-657, November.
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