Trade and the Topography of the Spatial Economy
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.
We thank George Alessandria, Dave Donaldson, Gilles Duranton, Pablo Fajgelbaum, Gene Grossman, Gordon Hanson, Johannes Horner, Sam Kortum, Kiminori Matsuyama, Stephen Redding, Esteban Rossi- Hansberg, Antonios Stampoulis, and Jonathan Vogel for their helpful suggestions and comments. Li Xiangliang provided excellent research assistance. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Arkolakis gratefully acknowledges the support of the NSF through the CAREER grant and under the title: Welfare Gains from Economic Integration: A Unified Approach.
Treb Allen & Costas Arkolakis, 2014. "Trade and the Topography of the Spatial Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 129(3), pages 1085-1140. citation courtesy of