Economic integration and agglomeration in a middle product economy

Abstract

We examine the interactions between economic integration and employment agglomeration in a neoclassical-growth, middle-product economy. There are two vertically integrated economies, with competitive final good firms operating plants in both regions and monopolistically-competitive intermediate good firms operating each in only one region. Immobile workers are employed with traded middle products to produce the nontraded final good; mobile workers are used with immobile capital to design and produce differentiated intermediate good inputs. While agglomeration and growth need not be positively related, trade need not enhance regional growth nor widen the skilled–unskilled wage gap.