Hansen Nobel 08 Krugman

Roskilde University2008 Nobel Prize SymposiumPaul Krugman:New theories on trade andcore-peripheryNew trade theoryNew economic geographyWhy important?Anders Chr. Hansen10-12-08

But why Volvos to Germany andBMWs to Sweden?Traded goods similarCountries similarAnders Chr. Hansen 317.12.2008

Intra-industry trade (share of total)P. Krugman Nobel Prize Lecture 2008Anders Chr. Hansen 417.12.2008

Krugman 1979, 1980Countries also trade because they are alikeReplace ”perfect competition” with more realisticStiglitz-Dixit (1977) assumptions• In most of OECD consumer preference for diversity –not for satisfying basic needs• Industries enjoy economies of scale – not diminishingreturnsIntra-industry trade in equilibrium• (In addition to trade due to differences, e.g.agricultural products)Anders Chr. Hansen 517.12.2008

Economies of scaleKrugman ande Obstfeld: International EconomicsAnders Chr. Hansen 617.12.2008

Trade gains and scale economiesDiminishing returns + large home demand =>importsIncreasing returns + large home demand =>exports• Even if true in both countriesExistence of intra-industry trade predictablenot amount of particular goodsTrade gains from scale economies + largeintegrated marketsAnders Chr. Hansen 717.12.2008

Why does manufacturing concentrate incertain regions?Core-periphery diversion when countriesindustrialiseTraditional explanations• External economies/Agglomeration benefitsbackground mechanisms outside location modelsKrugman 1991• Same assumptions + migrating industrial labourforce• Same self-reinforcing mechanismsAnders Chr. Hansen 817.12.2008

Linder: Home market effectThe home market works as a basis for exportsAnders Chr. Hansen 917.12.2008

Myrdahl: Cumulative causationMyrdal: Cumulative causation, virtuous andvicious cyclesLarge market => economies of scale => higherreal wage => immigration => largerproduction (out of region) => higher realwagesAnders Chr. Hansen 1017.12.2008

Hirschman: Interindustry linkagesBackward linkages• Many buyers => supplying industries locateForward linkages• Many suppliers => user industries locateAnders Chr. Hansen 1117.12.2008

Concentration in which region?Depends on initial head start, e.g.,• Transport hub (e.g., harbour)• Production or consumption located for otherreasons• (Perroux: Autonomous pole)Industrial clusters• Detroit, Hollywood, Silicon Valley• Also services like banking and insuranceAnders Chr. Hansen 1217.12.2008

Are the new theories about tomorrowstrade and regional patternsKrugman:• Recent trends in patterns• Regional convergence – less core-periphery, lessregional specialization• More low-income high-income trade – betweencountries that are very differentEconomies of scale always important – alsowhen everybody assumed perfect competitionBut research intensive industry exhibits scaleeconomies in a double senseAnders Chr. Hansen 1317.12.2008

Why important?Replacing hopeless assumptions of ”perfectcompetition” in standard trade trade model• Not immediate policy conclusions, but line ofthinking for empirical and theoretical research• Theoretical basis for gravity modelsCross-buandary approach: Takingachievements outside mainstream economicsseriousAnders Chr. Hansen 1417.12.2008

Thank you for your attentionAnders Chr. Hansen• Department of Environmental, Social, and SpatialChange• Roskilde Universityanders@ruc.dkAnders Chr. Hansen 1517.12.2008