NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade and the Topography of the Spatial Economy

Treb Allen, Costas Arkolakis

NBER Working Paper No. 19181
Issued in June 2013
NBER Program(s):   DEV   ITI

We develop a versatile general equilibrium framework to determine the spatial distribution of economic activity on any surface with (nearly) any geography. Combining the gravity structure of trade with labor mobility, we provide conditions for the existence, uniqueness, and stability of a spatial economic equilibrium and derive a simple set of differential equations which govern the relationship between economic activity and the geography of the surface. We then use the framework to estimate the topography of trade costs, productivities, amenities and the strength of spillovers in the United States. We find that geographic location accounts for 24% of the observed spatial distribution of income. Finally, we calculate that the construction of the interstate highway system increased welfare by 3.47%, roughly twice its cost.

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