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Title: Economic Activity across Space: A Supply and Demand Approach

Citation Type: Journal Article

Publication Year: 2023

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Abstract: The spatial distribution of people is incredibly concentrated: 8 percent of the US population lives in the ten largest US cities, but those cities take up less than 0.1 percent of total US land area. Why this concentration? More generally, what determines the distribution of people and economic activity across space? And how can economic policies affect the spatial distribution of economic activity? This essay will show that these questions can be answered through the familiar lens of supply and demand curves. We begin by applying this intuition to the well-known Rosen-Roback framework (Rosen 1979; Roback 1982). But as we will discuss, the distribution of economic activity in this early spatial model depends only on local geography, not on what happens to other regions. For example, a change in one location—say, a large infrastructure investment that improves its productivity—is predicted to have an identical impact on all other locations, regardless of where they are. Thus, intuitive spatial features like where a location is located on a map and who its neighbors are entirely absent: it is a spatial model where space does not matter. In reality, spatial linkages create rich interactions between locations. One implication of these interactions is that a large infrastructure investment that improves the productivity in one location will have greater impacts on close-by locations than locations further away. To account for such spatial linkages, we extend the intuition of the Rosen-Roback model to modern economic geography frameworks where locations are connected through the flow of goods, based on our earlier work in Allen and Arkolakis (2014). In this framework, the economic fate of a location depends not only on its own “local” geography but also on the local geography of its neighbors, the effect of which is mediated by the strength of the economic ties, creating a “global geography.” Despite this added complexity, we show the same tools based on supply and demand used to understand predictions of the earlier Rosen-Roback framework extend readily to a globally integrated world. This globally integrated framework can be applied to understand both the direct and indirect impacts of real world economic policies that change either the local or global geography. We discuss how the framework can be applied to spatial data, while also highlighting the most common pitfalls and offering strategies for traversing them. Finally, we provide a brief overview of the many ways in which this framework has been applied thus to understanding the spatial distribution of economic activity, as well as pointing out several interesting and still unexplored questions for future researchers. To keep the discussion as straightforward and accessible as possible, we relegate all mathematical details and derivations to the Appendix, where we also provide a companion Matlab toolkit to help researchers apply these techniques on their own.

Url: https://www.aeaweb.org/full_issue.php?doi=10.1257/jep.37.2#page=5

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Authors: Allen, Treb; Arkolakis, Costas

Periodical (Full): Journal of Economic Perspectives

Issue: 2

Volume: 37

Pages: 1-260

Data Collections: IPUMS NHGIS

Topics: Other

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