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Trade Policy and Mega-Cities in LDCs: A General Equilibrium Model with Numerical Simulations

  • Gelan, Ayele

This paper follows the new economic geography approach to model the relationships between trade policy and spatial agglomeration of production in the context of a small open developing economy. We construct a general equilibrium model with interactions between centripetal forces and centrifugal forces that determine linkages between urban and rural regions. Centripetal forces such as labor migration, increasing returns, and transport costs tend to concentrate economic activities and population in the urban region. This causes the inequality between urban and rural areas to increase. On the other hand, centrifugal forces such as congestion and urban land rents favor dispersion of firms and workers. This favors a balanced urban system that is conducive for rural development. We concentrate on explaining how trade policy affects the interactions between these forces by implementing the theoretical model through numerical simulations. The results suggest that trade liberalization can improve urban-rural inequalities as long as the country that implements trade policy reform does not face any trade restrictions in the external market.

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File URL: http://mpra.ub.uni-muenchen.de/1902/1/MPRA_paper_1902.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1902.

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Date of creation: Jul 2003
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Handle: RePEc:pra:mprapa:1902
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  1. Fujita, Masahisa & Krugman, Paul, 1995. "When is the economy monocentric?: von Thunen and Chamberlin unified," Regional Science and Urban Economics, Elsevier, vol. 25(4), pages 505-528, August.
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