Abstract
Traditional trade theory assumes that countries are dimensionless points. Recent research shows, however, that the internal geography of countries is important for the effects on trade. One aspect of internal geography is the uneven spatial distribution of factors of production. Factors of production especially concentrate in urban locations. The so-called lens-condition tests whether the (urban) distribution of factors of production is uneven enough to affect the national structure of trade. Using detailed data and applying the condition to 22 cities and 4 regions within The Netherlands for 2007-2017, shows that the condition is fulfilled. We explain why.
Highlights
Traditional trade models assume that countries are just points in space; the internal geography of countries is ignored
The national trade structure is not affected by the regional distribution of factors of production, and the Dutch integrated equilibrium can be reproduced by the regional trade structure
This equilibrium cannot be reproduced by trade flows, which suggests that a government might like to relocate factors of production within a country
Summary
Traditional trade models assume that countries are just points in space; the internal geography of countries is ignored. An early contribution in this respect is Courant and Deardorff (1992, 1993) Their analysis, based on the Heckscher-Ohlin trade model, provides a simple test to determine whether the national trade structure is affected by the uneven, or ‘lumpy’, distribution of factors of production within a country. In this note we use detailed firm-level data at the city level to determine whether the lens-condition holds for The Netherlands.5 If it holds, the national trade structure is not affected by the regional distribution of factors of production, and the Dutch integrated equilibrium can be reproduced by the regional trade structure.
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