Introduction

Typically, the long-run equilibrium allocation of footloose economic activity in the core model of geographical economics is characterized either by complete agglomeration or by spreading. Which equilibrium gets established depends critically on the initial distribution of the manufacturing labor force and a few structural parameters, notably the level of transport costs, the elasticity of substitution, and the share of income spent on manufactures. If transport costs, for example, are relatively low, the spreading equilibrium is unstable and agglomeration is the stable long-run equilibrium. Our simulations in chapter 4 with the core model of geographical economics clearly illustrate this (see figures 4.2 and 4.3). For many parameter settings the agglomeration forces are stronger than the spreading forces in the core model, which has only one spreading force: the demand for manufactured goods from the immobile labor force (the farm workers). We have also argued that the forces of agglomeration dominate in the multi-region version of the Krugman (1991a) model (the racetrack economy), such that economic activity is typically concentrated in one location, or only a few. Moreover, if the economy is concentrated in two or three locations, the distribution of economic activity is evenly spread among those locations.

These model outcomes are hard to reconcile with empirical observations. In reality we observe, at various levels of aggregation, multiple centers of economic activity that differ considerably in size (measured by the share of manufacturing production or the share of the mobile labor force).