Introduction

Chapter 5 shows that, although difficult, it is possible to test the geographical economics models empirically. At the same time, a number of important phenomena about the location of economic activity are not addressed by the core model of geographical economics. Consequently, the core model has been extended and improved upon in a number of interesting directions since Krugman (1991a). By definition, these extensions focus on aspects that are not part of the core model described in chapter 3. However, a few important building blocks of the core model have hardly been touched (yet), such as firm-specific economies of scale, imperfect competition, pecuniary externalities, and the Dixit–Stiglitz monopolistic competition framework, with its associated love-of-variety effect. Changes in, and extensions of, the core model usually focus on characteristics that can be adapted to better describe stylized facts, or shed new light on familiar problems. Chapters 7 to 11 give detailed examples of such extensions and adaptations, focusing on cities, multinationals, trade, growth, and policy implications, respectively. Instead, this chapter gives a broad overview of three different types of extensions. We label these types I, II, and III extensions, although it is sometimes not crystal clear under which heading a specific geographical economics model should be classified, in particular if there are multiple extensions incorporated in the same model. Table 6.2 at the end of this chapter gives a summary of the types of extension, and an overview of what to except in the rest of this book.

Type I extensions concern transport costs and the way “space” is handled. It was argued in chapters 3 and 4,tha t one of the attractive features of the core model of geographical economics is the neutrality of space.