Growth and Agglomeration of a Small-Open Multi-Regional Economy

Abstract

We study economic growth of a multi-regional small open economy in a perfectly competitive economy. The national economy consists of multiple regions and each region has one production sector and one housing sector. Following the traditional literature of small open economies, we assume that the rate of interest is fixed in international market. The production side is the same as in the neoclassical growth theory. Households move freely among regions, equalizing utility level among regions by choosing housing, goods and saving. A region’s amenity is endogenous, depending on the region’s output and population. We explicitly solve the dynamics of the multi-regional economy. The system has a unique stable equilibrium point. We simulate the motion of the model and examine effects of changes in the rate of interest, the preference, and amenity parameters. We show, for instance, that a productivity improvement in the region with lowest productivity reduces the GDP and GNP and a rise in the preference for large cities may accelerate agglomeration of the population and economic activities into a region with high productivity.