Regional and Aggregate Implications of Transportation Costs and Tradability of Services

What are the aggregate, sectoral, and regional effects of major technological advances and productivity improvements in shipping goods and transmitting data? This paper aims to provide theoretical and quantitative answers to this question. The theory features a realistic and novel treatment of freight and tradability of services in a multi-sector, multi-region model: each intermediate input, be it a good or a tradable service, requires the complementary supply of hauling and communication, respectively. Their low substitutability bestows transport and communication a critical role in establishing the spatial links between other sectors in the input-output structure. Existing work on modeling and quantifying trade costs, and the input-output structure of the economy typically follow separate tracks, without a unifying framework that treats freight and communication costs as determined by productivities of the sectors supplying these services. Workhorse models of economic geography investigating the effect of transportation technology and infrastructure feature a single-sector model of trade with iceberg trade costs but abstract from realistic input-output linkages in a multi-sector setting. General equilibrium models of the macroeconomy, on the other hand, typically feature a single region and thus abstract from spatial interactions across regions. None of these models distinguish transportation and communication in terms of their substitutability. We bring these two separate approaches together in order to analyze the aggregate, sectoral and regional effects of reductions in the cost of overcoming distance.