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How Regions Grow

Trends and Analysis

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Regional differences within OECD countries are often greater than those between countries and much inequality remains. This report explores what generates growth at the regional level. Based on in-depth econometric modelling and analyses, this report reframes the debate on regional policy and development, emphasising that opportunities for growth exist in all regions.

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Annex D

Main Models of the New Economic Geography

Krugman’s 1991 model includes two a priori identical regions in endowment factors; two factors of production – agriculture with its constant-returns tied to the land, and manufacturers with increasing-returns (though a monopolistic Dixit-Stiglitz model) – that can be located in each region; and transportation costs for manufacturing goods. Workers are mobile across regions. The model finds that as transportation costs decrease and economies of large-scale production are present, a region with a relatively large non-rural population (or larger initial production) will be an attractive place to produce because of the large local market and because of the availability of goods and services produced there. This will attract more people increasing local demand and profits and attracting more firms. The forces of agglomeration depend on the level of trade cost and the proportion of mobile population in response to wage differentials. The external economies are pecuniary (not technological), arising from the desirability of selling to and buying from a region in which other producers are concentrated.

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