Introduction

Typically, the long-run equilibrium allocation of footloose economic activity in the core model of geographical economics is characterized either by complete agglomeration or by even spreading. Which equilibrium is established depends critically on the initial distribution of the manufacturing labor force and a few structural parameters, such as the level of transport costs, the elasticity of substitution, and the share of income spent on manufactures. If transport costs, for example, are relatively low, the spreading equilibrium is unstable and agglomeration is the stable long-run equilibrium. Our simulations in chapter 4 with the core model of geographical economics clearly illustrate this; see Figures 4.2 and 4.3. Nevertheless, for many parameter settings the agglomeration forces are stronger than the one spreading force in the core model, the demand for manufactured goods from the immobile labor force (the farm workers). This has been discussed in section 4.10, which generalizes the core model to a racetrack economy, thus allowing for many locations in neutral space. We argued essentially that the forces of agglomeration are so strong in the racetrack economy that economic activity is typically concentrated in one, or only a few, locations. Moreover, if the economy is concentrated in two or three locations, the distribution of economic activity is evenly spread among those locations.

Both facts are hard to reconcile with empirical observations. In reality, we observe at various levels of aggregation multiple centers of economic activity, which differ considerably in size (measured by the share in manufacturing production or the share of the mobile labor force).