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The Linear Algebra of Economic Geography Models

Author

Listed:
  • Benny Kleinman

    (University of Chicago)

  • Ernest Liu

    (Princeton University)

  • Stephen J. Redding

    (Princeton University, CEPR, and NBER)

Abstract

We provide sufficient statistics for nominal and real wage exposure to productivity shocks in a constant elasticity economic geography model. These exposure measures summarize the first-order general equilibrium elasticity of nominal and real wages in each location with respect to productivity shocks in all locations. They are readily computed using commonly available trade data and the values of trade and migration elasticities. They have an intuitive interpretation in terms of underlying economic mechanisms. Computing these measures for all bilateral pairs of locations involves a single matrix inversion and therefore remains computational efficient even with an extremely high-dimensional state space. These sufficient statistics provide theory-consistent measures of locations’ exposure to productivity shocks for use in further economic and statistical analysis.

Suggested Citation

  • Benny Kleinman & Ernest Liu & Stephen J. Redding, 2023. "The Linear Algebra of Economic Geography Models," Working Papers 314, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:314
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    References listed on IDEAS

    as
    1. Rodrigo Ad'o & Costas Arkolakis & Federico Esp'sito, 2019. "Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence," Cowles Foundation Discussion Papers 2163, Cowles Foundation for Research in Economics, Yale University.
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    Cited by:

    1. Amine C-L. Ouazad, 2024. "Equilibrium Multiplicity: A Systematic Approach using Homotopies, with an Application to Chicago," Papers 2401.10181, arXiv.org.

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    More about this item

    Keywords

    economic geography; trade; migration;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F15 - International Economics - - Trade - - - Economic Integration
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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