From Trade and Spatial Theory to the New Economic Geography (NEG)

Abstract

A long-standing goal of economic theory has been to explain the location of economic activity into agglomerated clusters and a periphery. In the past, two distinct fields independently examined this question: trade theory and spatial theory. The New Economic Geography (NEG) model developed by Paul Krugman in 1991 successfully integrates both approaches. This paper contrasts NEG with the theories of Ohlin, Samuelson-Mundell, von Thunen, Weber, and Losch to understand the fundamental contributions preceding Paul Krugman’s NEG. Many of the ideas such as the trade-off between factor mobility and transportation costs, between economies of scale and transportation costs, regions, iceberg transportation costs and intra-industry trade have been addressed earlier in interdisciplinary models of trade and spatial theory. The real contribution of NEG thus lies in the integration of pre-existing theories into a unifying analytical formulation.