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AEDE 3680 Midterm 1 Study Guide

by: Sophie_

AEDE 3680 Midterm 1 Study Guide AEDE 3680

Marketplace > Ohio State University > Economcs > AEDE 3680 > AEDE 3680 Midterm 1 Study Guide
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Lectures 1-5 of AEDE 3680 Regional Economics & Sustainable Growth are included in this study guide! Diagrams can be found in the PowerPoints posted on Carmen. This is meant to explain concepts in a...
Regional Economics
Alessandra Faggian
Study Guide
AEDE, AEDE 3860, regional economics, Economics, Study Guide
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This 5 page Study Guide was uploaded by Sophie_ on Saturday March 19, 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 152 views. For similar materials see Regional Economics in Economcs at Ohio State University.


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Date Created: 03/19/16
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 1-5 are included in this study material! LECTURE 1 What is regional economics? • General regional economics can be defined as the “subject concerned with understanding and explaining the geographic configuration of the economy, particularly regarding industrial location, regional development, urbanization, migration, land use, etc.” (The Canadian Encyclopedia, 2010) • Hoover and Giarrantani (Chapter 1) state that regional economics can be seen as the subject which tries to answer this question: ”What is where, and why—and so what?” o What: every type of economic activity. The role of space is fundamental. o Where: locations; involves proximity, concentration, dispersion, similarity or disparity of spatial patterns. o Why and so what: economic interpretations and policy implications. • Why different parts of the same economy (regions) behave differently. What is a “region”? • Many different definitions • The United States can be divided into different regions: o Counties o States o Time zones • In Europe, there are three different levels: o NUTS1—major socioeconomic regions (97 current) o NUTS2—basic regions for the application of regional policies (271 current) o NUTS3—small regions for specific diagnoses (1,303 current) • HOWEVER, the population thresholds are very different for the U.S. versus Europe. There’s more variation within the United States. E.g… o NUTS 1 minimum is 3 million and maximum is 7 million o NUTS 2 minimum is 800k and maximum is 3 million o NUTS 3 minimum is 150k and maximum is 800k o There are some exceptions LECTURE 2 Industrial Location Analysis: The Weber Model • Basic models proposed by Weber and Moses are based on transportation costs 1 • The Weber model (1909) represents the “fundamental building blocks of microeconomic firm location analysis” (McCann, page 3). It’s based on a few simplifying assumptions… o 1. The firm is defined as a point in space (there can be no multiple locations); o 2. The aim of the firm is simply to maximize profit; o 3. The firm produces one product using only two production factors; o 4. There is a fixed production factor relationship, e.g. there is only one “recipe” to combine the two factors to get the final product. • The Weber Model terminology o Inputs—production factors which a firm uses to produce a good o Output—final product produced • The location problem can be graphically represented by what has become known as the Weber triangle. o The equilibrium point is the final location. o Isodapanes can be used to incorporate costs of labor or land § Moving is costly, so a firm relocations ONLY when the following condition holds: labor cost savings > extra transportation costs + relocation costs § The government offers incentives for relocation in more peripheral areas to help depressed regions…the industry relocates if this condition holds: labor cost savings + governmental incentives > extra transportation costs + relocation costs Classification of Firms 1. Resource-oriented—firms whose location decisions are dictated by the location of natural resources. In a sense, their location decisions are the easiest because they have few choices regarding where they can locate…e.g. coalmines have to be located near coal deposits. Google International Falls in Minnesota. It’s the “Icebox of the Nation” because businesses that need to test items to be used in cold weather locate there. 2. Transport-oriented a. Input-oriented—engaged in weight-losing activities, e.g. where the output is lighter than its inputs and hence less expensive to ship…inputs are more fragile or spoil quickly. E.g. canning firms tend to locate near the input source. Fish spoils quickly before being canned. b. Market-oriented—the firm minimizes total transportation costs by locating at the market. These firms are normally engaged in weight-gaining activities, e.g. where the output is heavier, bulkier, more delicate, perishable or more dangerous than its inputs and hence more expensive to ship. 3. Footloose—firms that are not tied to any particular location, and for which transportation costs are not very important. Therefore, they are neither resource- nor transport-oriented. Most services are footloose, but they still tend to locate in central areas where they can exploit agglomeration economies (to be mentioned later). LECTURE 3 The Moses Model (1958) 2 • Takes into account that inputs can be substitutable, which is important because in reality firms have more than one input “combination” to produce an output o In producing a car, a firm can use 150 kg of steel and 50 kg of plastic, or 100 kg of both, or 50 kg of steel and 150 kg of plastic • Opposite of the Weber Model. Without input substitutability, the firm would have moved closer to the more expensive input to save on the highest transportation costs. • The Moses Model considers both input combination and distances. o Moses is a better approximation, but Weber is a better representation Palander and Hotelling Models • Assumes that markets are areas, instead of a point in space (y) like in the Moses and Weber models. • Palander Model o Two firms A and B are located in areas A and B respectively. A one-dimensional market area is defined by the line OL. o Different transportation costs are represented by branches of the “tree.” Steeper branches mean higher transportation costs. • Hotelling Model o Space gives you an advantage (spatial monopoly) provides an incentive for firms to use location as a “competitive weapon” to acquire greater monopoly. o There’s an incentive for firms to move towards each other at the center of the market…for the Nash equilibrium (neither firm has an incentive to move from this equilibrium). o Welfare loss is represented on the graphic. The gain is in the middle. LECTURE 4 Thanks to globalization, transportation costs have decreased over time…”Over the twentieth century, the real costs of moving a ton a mile by rail declined by more than 90 percent” (Glaeser and Kohlhase, 2004). • For manufacturing activities, relocation to more peripheral areas has become more common (e.g. to Eastern Europe, China, India, etc). Decline of manufacturing in the U.K. • More peripheral, disadvantage areas try to compete with the more “central” ones accepting lower wages. Is the world becoming more flat or spiky? • Flat—activities are more dispersed • Spiky—activities are more concentrated in fewer large cities Agglomeration Economies • Agglomeration—a point in space where a certain activity is particularly dense • Agglomeration economies—advantages (savings on costs) which accrue to all the firms located in the same area. They are location-specific economies. o Can more than compensate for increases in local factor prices. 3 • Three sources of agglomeration economies: o 1. Local tacit knowledge (spillovers)—If many firms in the same industry are allocated in the same area, the employees of one firm have relatively easy access to the ones of another firms both via face-to-face business meetings but also via informal contacts (lunch meetings, social occasions, etc), so they might exchange tacit information that is not traded in the market. E.g. the financial sector in London. o 2. Non-traded local specialist inputs—If many firms in the same sector cluster together, then there is the possibility for certain specialist inputs to be provided. These would not be possible if there was not enough demand. E.g. special legal firms of software firms serving the financial sector in London. o 3. Local skilled labor pool—The same is true for “specialized labor.” If more firms of the same sector are co-located, people with the required skills will be available in the local area; hence the firm will not be required to spend money in specialized training and will spend less in recruitment costs (easier to find). • Three main categories of agglomeration economies: o 1. Internal returns to scale—internal to the firm and linked to the size of the firm. It’s generally more convenient for a firm to produce large quantities than small ones. Doubling the inputs more than double the output. Hence, it’s better for a firm to have a large factor in one location rather than two smaller ones in two different locations. o 2. Economies of localization—external to the firm, internal to the sector. These are linked to the fact that different firms in the same sector are co-located, creating clusters. They create a critical mass so that suppliers, etc, can move in as well. Specialized workers also migrate in the area. o 3. Economies of urbanization—external to the firm, external to the sector. These accrue to firms belonging to different sectors that are co-located. The fact that lots of different firms are in the same area means that certain services can be provided, e.g. an airport or certain marketing or advertising services, etc. Industrial concentrations can be measured by location quotients (LQ). • If LQ >1 the region specializes in that particular sector. • If LQ < 1 the region is lower than the national average and the region is probably an importer of that good. • If LQ = 1 then that region does not specialize in that output. LECTURE 5 Urban hierarchies and “central place theory” • Trends: o Nations tend to be dominated by one or two primal cities, generally located in the center of the major populated regions. o The larger cities produce the largest variety of outputs while smaller cities produce a smaller range of services and goods. 4 Christaller Model (1933) • Based on the observations of the spatial distributions of cities and towns in Southern Germany in the 1930s. • Formulated by Christaller, who tried to establish whether there was some kind of regularity in the number of cities ranked at the different levels of the urban hierarchy. • Assumptions: o Isotropic space (flat, identical in all directions) o Transportation costs equal in all directions o Population and resources equally distributed in space o There are N different goods, g, that can be produced o A hierarchy of N different market areas levels m o And a hierarchy of different urban centers • Higher order goods provide higher order (larger) market areas—in other words, goods are ordered from the one with the largest market to the one with the smallest market o Market area m=1 for good g=1 o Market area m=2 for good g=2 o Etc… • Because there are different centers producing the same ranked good, the final market areas are actually not circular but hexagonal o For each city of rank 1, how many cities, say, rank 2 are likely to exist? There are three possible answers. § 1. The Market Principle—Each lower ranked town grows where there is more space (larger market). The rank 2 cities will locate themselves at the 6 vertexes of this hexagon. § 2. The Transportation Principle—If you believe that what matters is how centers are connected in terms of transportation (e.g. roads). The rank 2 cities will locate themselves on the straight line that connects two larger cities. § 3. The Administrative Principle—If the smaller area has to be contained within the larger area (e.g. cities in an administrative region), then there will be more rank 2 cities with smaller market areas. Zipf’s Rank Size Rule • Formula: Rank order = (population of the dominant metro area)(city population) 5


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