A Two-group Regional Growth Model

Abstract

People’s preferences and human capital are different. Heterogeneity in preferences among individuals is an important determinant of spatial structure. Individuals may differentiate quite strongly among particular regions based on differences in local climate or amenities available. These differences may have impact on the location of consumers and producers. They may also create spatial agglomeration economies in consumption and production. Many economic theories which explain various aspects of the complexity of economic geography have been proposed. For instance, economic growth theories emphasize economic dynamics with capital, population and knowledge accumulation, but neglect spatial characteristics of economic activities. Some spatial economic models take account of endogenous capital and population growth, but neglect interregional issues (e.g., Henderson, 1985, Miyao, 1987, Richardson, 1977). This chapter tries to propose a dynamic economic growth model with interregional trade, synthesizing the ideas in the standard one-sector neoclassical growth model and the Kaldor-Pasinetti two-group model.