Archive for May 31st, 2011

Is New Economic Geography (or Krugman) right….

May 31, 2011


Jessie H. Handbury and David E. Weinstein of Columbia University have this superb paper.

Crux of New Economic Geography (or NEG) developed by Krugman is:

Economies of scale may lead to rapid urbanization. Since 2007, for the first time in history, more than half of the world’s population live in cities. Paul Krugman has shown how economies of scale along with falling transportation costs can trigger a self-reinforcing process whereby a growing urban population gives rise to more large-scale production, higher real wages and a more diversified supply of goods. This, in turn, stimulates further migration to cities. The end result may well be that regions become divided into an urbanized core and a less developed “periphery”.

This paper looks at this issue of whether larger cities lead to higher varieties and lower costs:



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