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We now have a soluble set of equations for short-run equilibrium. Equations (15)–(17) need to be
solved simultaneously for the vectors Y, T, and w; given these one can then solve (18).
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These equations are easily solved on the computer in the numerical examples below, I simply started
with an initial guess at w and then cycled (with some damping) over (15)–(17) until convergence. In
general, however, they cannot be solved with pencil and paper. Yet we would like to get some intuition
about the forces in our model before going over to numerical methods.
In order to do this, we examine a limited question for a special case, before moving on to more general
problems.
Centripetal and Centrifugal Forces
In this section of the appendix I ask a question originally posed in Krugman (1991), but which we can
now restate in terms of our more general framework.
Consider an economy with only two locations, each of which has the same number of farmers (Φ1 = Φ2 = 0.5). Under what conditions is concentration of all manufacturing in one location (λ1 = 1 or 0) an
equilibrium? By answering this question, we get some useful insights into how the parameters of the
model affect the relative strength of centripetal and centrifugal tendencies.
What we do is solve (15)–(18) on the assumption that λ1 = 1, λ2 = 0 (the case where λ1 = 0 is
symmetric). We ask whether, in that case, the real wage that workers would earn at location 2 is less
than that at location 1. Concentration of manufacturing at 1 is an equilibrium if and only if ω2 ‹ ω1 in
that case.
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