AEDE 3680 Midterm 2 Study Guide
AEDE 3680 Midterm 2 Study Guide AEDE 3680
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This 7 page Study Guide was uploaded by Sophie_ on Tuesday April 12, 2016. The Study Guide belongs to AEDE 3680 at Ohio State University taught by Alessandra Faggian in Spring 2016. Since its upload, it has received 109 views. For similar materials see Regional Economics in Economcs at Ohio State University.
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Date Created: 04/12/16
AEDE 3680 Midterm 1 Study Guide Regional Economics & Sustainable Growth Many of these notes are derived from Dr. Faggian’s PowerPoint slides posted on Carmen. I find that her slides contain much useful material that has aided in my understanding of class concepts. Lectures 7-11 are included in this study material! Lecture 6 is briefly reviewed below. LECTURE 6 • Various factors influence the net present value of migration. These factors, also called determinants of migration, include: 1. Individual characteristics a. Age b. Family circumstances c. Education 2. Regional characteristics a. Unemployment rates b. Real earnings c. Amenities 3. Other characteristics a. Distance between origin and destination b. Business cycle LECTURE 7 • 2. Regional Characteristics o 2a. Unemployment Rates § ORIGIN: High unemployment rates at the origin should increase out- migration: “PUSH” factor § DESTINATION: Low unemployment rates at the destination should increase in-migration: “PULL” factor • 2b. Real Earnings o According to the neoclassical disequilibrium model, people react to initial disequilibria in wages by moving from low- to high-wage regions until the equilibrium is restored. • Disequilibrium Model of Migration o A region has a limited capability of adjusting wages internally. However, there’s a mechanism that operates at the interregional level that allows the region to adjust more rapidly to labor market changes. o Mechanism is interregional migration. o Refer to graphics. § Labor moves toward the high-wage regions and capital moves toward the low-wage regions. § Wages go up in the low-wage region, wages go down in the high-wage region, and long-term equilibrium is achieved eventually. o Policy implications: § Migration is a re-equilibrating mechanism. § If the neoclassical model is true, we should observe convergence among different regions and nations in terms of wages and unemployment. • Why do regions/nations NOT converge? o Disequilibrium approach: migration is re-equilibrating, but it’s too weak. o Equilibrium approach: the disequilibrium approach does not consider the role of amenities. § Amenities are at least as important in explaining why people migrate from one area to another. o Endogenous growth: there is cumulative causation in a region. • 2c. Amenities o People migrate towards areas with more amenities, e.g. a higher quality of life. o Amenities are location-specific. You cannot move them. o Differences in real wages do NOT reflect real differences in the utility of people. § Wages are compensating in nature—people are paid more because their jobs are located in places with a generally lower quality of life. • Equilibrium Model of Migration o Wages are not only reflective of the productivity of individuals but also a “compensation” for amenity differences across different job locations. o In areas with high amenities, people might be willing to accept lower wages and vice versa… o Quality of life indexes (QOL) § If we could properly incorporate differences in QOL in the salaries, the salaries will be closer to equilibrium levels and will be equal across space. • Endogenous Human-Capital Model of Migration o All individuals are the same. o Self-selection in migration: better-educated people tend to be more migratory. o Refer to graphics. o The basic idea is that growth can be “self-sustaining,” so that in some areas…highly skilled workers move from the low- to high-wage region, which then experiences innovation, growth, etc. = CUMULATIVE CAUSATION. o Policy implications: § It’s possible for certain areas to experience a positive and non- diminishing growth rate. § If divergence among countries and regions is not good for society overall, and the market solution is not the social optimum, then public intervention is necessary. • E.g. knowledge creation (education or on-the-job training), and/or subsidies for R&D activities) • Human capital migration theory o People with a higher level of embodied human capital (better educated) are more mobile. • 3. Other Characteristics o 3a. Distance § The probability of migrating decreases with the distance a person must move. § The higher the distance… • The higher the transportation costs • The higher the psychological costs • The less the information about the job opportunity at the destination • Gravity Model of Migration o Suggests that the level of migration between any two areas is… § Positively related to the population sizes of the two areas § Negatively related to the distance between the two areas (distance deterrence) • 3b. Business Cycle o Migration flows tend to rise in times of prosperity and fall in a recession. o Risk aversion—people are less prepared to move when unemployment rates are higher because they could not end up having a job at all. LECTURE 8 CONSEQUENCES OF MIGRATION • Migration has positive and negative consequences: o POSITIVE o NEGATIVE o 1. Personal gains (higher o 4. Negative externalities (e.g. salaries) congestion) o 2. Efficient reallocation of o 5. Weakening of sending resources regions/countries (brain drain) o 3. Positive externalities (e.g. o 6. Lower salaries for natives knowledge spillovers) • 1. Personal gains o a. Uncertainty and imperfect information § Some migrants do not benefit from migration at all. Job not found, higher living or psychological costs, etc. Return migration may also happen— very costly. This has a function for society though: the reduction of imperfect information. o b. Timing of earnings gains § Sometimes it takes a long time before a migrant started benefiting from higher returns. o c. Earnings disparities § High variance of returns. Self-selected migrants. Returns depend on human capital and skills transferability. o d. Earnings of spouses § Normally, migration increases the income of the main income earners in the family but badly affects the income of the partner in the short term. o e. Involuntary migration § People for whom migration is NOT completely voluntary (e.g. consequence of job loss, political repression, war) have normally lower returns than other migrants • 2. Efficiency gains: reallocation of labor o Use labor demand curves, which show the relationship between wages and number of workers. Downward-sloping (more workers, lower average wage). o If output gain > output loss, there’s an efficiency gain. o Wage-induced migration increases the total income and output in the combined origin and destination! • 3-4. Externalities o Negative: congestion, crime, need for more public services, schools, roads, etc… o Positive: knowledge spillovers (informal knowledge exchanged over lunch, outside formal channels, etc) • 5. Wages of natives o Natives and immigrants can either be substitutes or complements in the labor market. o If substitutes, wages go down. o If complements, demand increases on graph and both wage and number of jobs of native workers can increase. LECTURE 9 Globalization • “Is the process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology” • Implies the compression of time and space which allows for increasingly rapid rates of global interchange • Interconnected with industrialization and urbanization • No consensus on when globalization started, BUT it started around the time when Christopher Columbus arrived in the Americas. • Trade + globalization à evolution of urbanization patterns o As the world became more “globalized,” urbanization moved towards other areas… • Industrialization was responsible for the speeding up of urbanization… o Industrialization: “the process in which a society or country/world transforms itself from a primarily agricultural society into one based on the manufacturing of goods and services” o Industrial Revolution 1760-1820s § The more productive cities were, the larger they were growing and the more globalized they were LECTURE 10 Globalization & urbanization • In terms of economic geography, the evolution in trade and globalization was accompanied by an evolution of urbanization patterns. • The period between 1975 and 2000 was a period of rapid urbanization. • By 2008, for the first time, more than 50% of the world population was actually living in urban areas… • Urbanization was happening in both developed and developing countries o In developing countries, the rate of urbanization was much faster. o Current evidence suggests that the rate of urbanization in the developing world will continue to increase even faster compared to the developed countries. LECTURE 11 • Geography matters o Flat vs. spiky world • Spatial transaction costs o “the costs associated with engaging in, and coordinating, economic activities and market mechanisms across geography” § e.g. transport costs, logistic costs, information costs, knowledge exchanges, etc • Falling spatial transaction costs o Since the 1980s, there’s been a dramatic improvement in the ability to coordinate activities over space. o Lots of technological advancements—especially in ICT (information and communication technologies) à costs of transmitting knowledge across space are much lower. § Can offshore and outsource more activities o Examples: § International accounting: banks in NY and London transfer their bookkeeping requirements overnight to firms in Ireland or India to have them updated for the next morning; § Software development: outsourced from Silicon Valley to sub-contractors in India; § Call centers with subcontractors in India. • Basic ideas… o 1. Developments in communications and transportation o 2. Increased offshoring and outsourcing o 3. Production systems highly disaggregated spatially across regions and countries • Rising spatial transaction costs o Improvements in ICTs have increased the quantity, variety, and complexity of the knowledge and information produced and transmitted o It’s easier and cheaper to send information, but now we send more of it FASTER. o Firms in advanced societies are increasingly competing in industries: § High content of complex knowledge § High value added products § Products with very short life cycles e.g. computers or phones • Globalization is making it more convenient to locate in cities. • The world’s highest-productivity cities are NOT mega-cities or even very large cities. o Most are medium-sized metro areas.
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