The Spatial Economy

Abstract

The Spatial Economy: Cities, Regions, and International Trade By Masahisa Fujita, Paul Krugman, and Anthony J. Venables. Cambridge, MA: MIT Press, 1999. Pp. xiii, 367, $35.00. Economic Geography has received substantial attention in recent years and the authors of this book have been at the forefront of this literature. In essence, this book is a revision and enhancement of journal articles written by subsets of these authors. In the time since the original works were published, the authors have figured out ways to sharpen their results and to add some new ones. With the additional space afforded by a book as opposed to a journal article, they have room to consider a wider set of cases. There are also more references to earlier work in regional science and geography. It is clear that if one wants to cover this material in a graduate course, one should use this book rather than the original journal articles. Since the book aims to be a complete theoretical analysis, much of the book involves complicated derivations (many chapters have more than 30 equations). In no way is this book aimed at a popular audience or for any kind of typical undergraduate course. Nevertheless, those who have come to expect excellent writing in any manuscript with Krugman's name on it will not be disappointed. Serving the equations up along side nicely written prose makes the equations easier to swallow. Also, the authors do a good job of highlighting the key elements of the models in introductory chapters; by the time you start trudging through the equations you have a pretty good idea of what is in them. The book has three main sections, each corresponding to a journal article antecedent. The first section looks at "regional economics" and is based on the famous Krugman (1991) Journal of Political Economy article. In the authors' view, a regional model is one where factors such as labor are free to flow across regions but other factors such as land are fixed. The point of the analysis is to show how with scale economies, product differentiation, and transportation costs, a core-periphery structure can emerge endogenously. The core will attract workers because of the appeal of the large variety of differentiated products found in the core. The core will attract firms because of the appeal of large markets for their goods and a large pool of potential workers (forward and backward linkages in the parlance of regional economics). Thus a gravitational pull of workers and firms to the core is endogenously created. The second section looks at "urban economics," and part of this section draws from Fujita and Mori (1997). This section succeeds in getting a rent gradient (the price of land falls as we move away from the city) as well as a system of cities that looks something like Christaller's central place theory. The third section looks at "international economics" and is based on Krugman and Venables (1995). Here international economics is just like regional economics except that labor is no longer a mobile factor. Ideas such as central place theory and core-periphery theory are as old as the hills. The authors make no claim that they are the first to propose these ideas. They recognize that others have put forth these ideas either with informal discussions or with formal models of social planner problems. As the authors see it, their contribution is to show that these outcomes can arise in a formal equilibrium model where agents are maximizing. What makes this a technical challenge is that scale economies are crucial in these stories. From the outset, we have to rule out our workhorse model of perfect competition. They are able to overcome the technical challenge by trotting out the Dixit-Stiglitz model of monopolistic competition, where the use of constant elasticity of substitution (CES) production functions results in substantial simplifications. Their use of this model in the book is so pervasive that the authors joke they could have renamed the book, Games You Can Play with CES Functions. …