Economic Theory Papers

(Economic Geography, Regional

Development, and Trade)

1. Krugman, P.R., 1991, Increasing Returns and Economic

Geography, Journal of Political
Economy, 99: 483-499.
This is the first paper combing the concepts of Geography and Economic with
theoretical economic model. Before of this paper, researchers believe that the inequality
of urban and rural area is due to some geographical reasons. Especially international
trade theory conventionally treats nations as dimensionless points. However, after this
paper, people start to think about how to deal with the geography in economics.
Paul Krugman explains the role of geography in inequality of urban and rural area with
concept of transportation costs, economies of scale, and the share of manufacturing in
income. In the past, transportation costs are relatively high. So, manufacturing firms are
evenly distributed following the distribution of farms because it is hard to cover the
transportation cost and make profit more if they located far from the farms which are
source of demand. However, with the technology improvement, transportation cost has
decreased significantly. As a result, manufacturing firms start to concentrated to some
big cites. If the level of transportation cost is relatively low, then they could get a benefit
from the scale economies that production costs get lower as manufacturing firms
produce more goods. More than this, if the share of manufacturing in national income is
high, then manufacturing firms by themselves could be a source of demand market such
as firms demand intermediate goods to produce their output goods. With low
transportation costs, high level of economies of scale, and the high share of
manufacturing in national income, concentration to the big city such as Manhattan, and
Seoul, has been accelerated.
This paper is not directly related to GIS. However, with this paper, economists start to
concern about the geography because of the effect of distance on transportation costs.
Like the weight in interpolation in GIS which is reciprocal of distance, distances have
positive relation with transportation costs in general. Thus to analysis the effect of
distance or transportation cost on concentration, economists need to use the GIS
package. I believe this is the results of this paper.

2. Henderson, J. V., Shalizi, Z. and A. J. Venables., 2001, Geography

and Development,
Journal of Economic Geography, 1:81-105.
Henderson mentioned that the theoretical and empirical analysis is needed to
increase understanding of the role of geography in development and to better design

development policy and that the main topic of economic geography of the world is the
uneven distribution of activity. From the point of a class economic, all spatial inequalities
or differences in land rents and wages are gone away because of competition of
economic agents. However, in the real world, it is not happened.
To explain the reason of concentration of urban, he is introducing agglomeration
effects. Agglomeration force is the result of the increasing returns to scale, lowering of
transport costs, spillover effects of knowledge, market access, and thick labor markets.
With the agglomeration force, the new centers are formed which is called urbanization. In
addition, he points out the deconcentration of urban area using the examples of Korea.
Now to attain the economic efficiency, we need to limit the city sizes. In this paper, he
only mentions the economic concepts or implications of economic geographies.
However, to analysis the empirical effects or the consequence of concentration, we need
GIS program to visualize it and implement spatial analysis. This is the field of what I like
to do.

3. Davis, D., and D. Weinstein, 2003, Market Access, Economic

Geography and Comparative Advantage:
An Empirical Test, Journal of International Economics, 59: 1-23.
This paper focuses on new field of economic geography, which is a home market
effect. In the neoclassic economy, export and imports are determined by comparative
advantage, which is the ability to produce goods at a lower price. However, in empirical
world, large countries export more than small countries and these results contradict the
comparative advantage theory. The main source of this is home market effect which is
the concentrated city has more advantage. For example, the wages are high in
concentrated city rather than the rural and huge consumptions by itself create the
technology progress and productivity enhancement. As a result, large countries export
more. To decompose the effect of comparative advantage and the home market effect,
Davis and Weinstein use the 22 OECD countries data. The bottom line of this paper is
that concentration creates home market effect which makes economy get more benefits
from concentrations.
This paper is not a direct application of GIS. However, this paper gives a foundation to
apply GIS to economics. This paper proposes the new idea to the international
economics. Before of this paper, researchers believe that comparative advantage
determines the trade flows. In this perspective, concentration or urban do not matter in
economics. However, by introducing home market effect, now we consider the
concentration of urban and economic geography again.

4. Redding, S., and A. J. Venables, 2003, Economic Geography and

International Inequality,
Journal of International Economics, 62:53-82.

This paper provides the theoretical foundation of economic geography. Here that is
market access. If firms locate in the concentrated urban area, then they can easily
access to the market which is the source of demand and save some costs such as
transportation costs or storage costs. As a result, they could pay more wages to the
workers using the saved costs. This is the one of reasons why workers in the city get a
higher wage than that of rural. To measure the market accessibility, Redding and
Venables use the instrument variables that are dummy variables of each country and
decompose the dummy variables to analysis the actual distance data.
Since the limitation of data, the authors do not use the GIS or actual measures for the
market accessibility. Limitation of available data is the big problem of economics.
Economists need not only geophysical data, but also democratic data of people who live
in the area. With this limitation, it is hard to use GIS package in economics, and this is
the reason why the authors of this paper struggled to overcome the econometric
problems coming from limitation of dataset they have. If they had the micro level raw
data, then they would be able to use the GIS program and easily analyze the effect of
market accessibility on wage rates.

5. Antle, J. M. et al., 2003, Spatial Heterogeneity, Contract Design, and

the Efficiency of Carbon
Sequestration Policies for Agriculture. Journal of Environmental
Economics and Management.
This paper is about sampling of the agricultural cropland soils to make carbon
sequestration contract more efficiently. In the carbon sequestration, how to sampling the
soil is the big problem because of sampling costs. In general, instead of payment
farmers per tonne of soil carbon sequestered, US government adopts lump sum
payment, per hectare contracts, which is free from the actual sequestered amounts of
carbon. This paper deals with the ways how to estimate the costs of implementing these
more efficient contracts, taking into account the spatial heterogeneity of agricultural
production systems and the costs of implementing more efficient contracts. The solution
of this paper is simple; measurement costs to implement the per-tonne contracts are
smaller than the losses of the per-hectare contract. Thus it is reasonable to bear a
significant cost to implement per-tonne contracts and achieve a lower total cost. To
explain this, this paper heavily relies on statistic skills.
I believe aerial photos could be an alternative method to save the investigation costs.
With this photos and GIS, researchers could be analysis the amount of sequestered
carbon. However, so far, measuring the amount of sequestered carbon is not an easy
job because it takes lots of time. It would take 6 to 7 more years to measure the carbon
sequestered because speed of carbon sequestering is very slow. If relations between
soil characteristic and carbon sequester are revealed, then GIS would be the best way to
solve contraction problem. This could be the potential field of GIS.

6. Rossi-Hansberg, 2005, A Spatial Theory of Trade, American Economic

Review, 95: 1464-1491.
This paper deals with the relationship between trade and the spatial distribution of
economic activity. The spatial distribution of economic activity determines the regional
trade patterns such as specialization of product and employment concentration and the
effect of trade frictions. The key concepts of special economy are agglomeration effects,
transport costs and congestion forces because these effects would determine the
specialization, border effect and difference in input prices. If we could explain the spacial
heterogeneous distribution of economic activities, then this should be the solution of the
border puzzles of gravity model. The distribution of economic activity depends on the size
of transport costs and other externality parameters such as agglomeration and
congestion costs. This explains the trade flows inside the European Union and for states
in the US at which equipment prices are higher in developing regions than in developed
economies is a natural outcome of this theory.
I believe this paper would be a theoretical fundamental for the use of GIS in
economics fields. To apply GIS in economics, economists should understand why
economic geography is important and how they work in economic contexts. Here,
external interaction of economic behavior creates two effects, agglomeration and
congestion, and these two determines the heterogeneous distribution of economic
activities. As a result, this causes the difference in input prices. With the GIS, we could
extend the idea of this paper by visualizing the changes in activity distributions.

7. Baldwin, R., T. Okubo 2006. Heterogeneous Firms, Agglomeration

and Economic Geography
: Spatial Selection and Sorting, Journal of Economic Geography, 6:
323-346.
The author applies Melitz-style model of monopolistic competition which introduces the
heterogeneous firms to economics. The author introduces two effects; one is selection
effect meaning standard empirical measures overestimate agglomeration economies
and a sorting effect meaning that a regional policy induces the highest productive firms
to move to the core and the lowest productivity firms to the periphery. More on these, he
shows that heterogeneity weakens the home market effects. Like other papers, this
paper also expands the border of economic geography breaking the traditional belief.
This is the remarkable result showing a self-selection effect which is high productive
firms self select to go to center of concentrated urban city. With this result, the governor
could implement effective policies to support firms. However, the author does not
actually show this hypothesis using empirical analysis. What he does just set a model
and prove it in mathematically. I think we can use the GIS to show this using empirical
evidence and this is the reason why I take the GIS course. GIS is the powerful tool to
show the actual distribution of firms and visualizing the actual relationship between
firms.

8. Altomonte, C., I. Colantone. 2008. Firm Heterogeneity and

Endogenous Regional Disparities, Journal of
Economic Geography, 8: 779-810.
In this paper, the author tries to explain the regional disparities using firms
heterogeneity. He introduces Romanian firms which was adapted communism in early
1990s but transited to capitalism. He mentioned that in early 1990s, there are relatively
small regional disparities because of communism. All firms are evenly distributed
regardless of productivity. However, after transition, disparities between regions emerge.
Firms are concentrated to some big cities. The author explains this disparity is entirely
endogenous to the heterogeneity of firms behavior in the some regions. High productive
firms move to the big cities and pay higher wages to workers. In addition, high productive
foreign firms also open their office in the big city. Thus, only domestic firms located in
the core of urban could get a advanced knowledge from the high productive firms from
the spillover effect.
However, some economists point out that this paper has a circulation problem. The
author fails to identify the actual cause of disparity problem. Firm heterogeneity is not a
driving force. It could be the result of regional disparities. However, firm heterogeneity
has some implication for the regional inequality. I believe GIS is a good method to show
this on the real map. Economics need powerful package to visualize this theory and a
hypothesis. These days some economists start to use the GIS to visualize the concepts
of economic geography. I believe that regional disparities and distribution of
heterogeneous firms are the good example to apply the GIS.
1. ESRI, GIS best practices: GIS for Economic Development, 2010.

There are two major economic fields which use the GIS in conducting analysis:
environmental economics and development economics. This paper introduces various
applications of GIS to economic development. Since it is the beginning of economics to
use GIS in its analysis, economists do not have much information about GIS. So this
paper introduces some applications to encourage the economists to use GIS.
Applications include showing grows economy with GIS to help local businesses thrive,
reforming economic development and fighting sprawl with effective maps, GIS foresters
economic development in Asheville, a formula for revitalization, and mapping urban
inequalities with GIS. These actual applications are similar with examples what I did in
GIS 565.
I think since it is the beginning for economist to use and understand the GIS tools.
Thus, so far not so much applications are in economic field. However, in ten years, GIS

would be a major tool in economics since GIS has powerful analyzing tool such as
spacial analysis, visualization of actual distribution, and buffering. This paper could be a
guideline to show how to use GIS in conducting economic analysis. For me, showing
economic inequalities with GIS is directly related my thesis. Since opening borders
causes redistribution of wealth in actual world, I could actually show that which regions
are lose or gain; that is regional inequality.

2. Jill Harris, Using GIS to Teach Economics: Evidence of Increasing Returns to

Scale, 2010.

This paper is another good application report of GIS in economics. When the author he
teaches managerial economics, he faces students complain about the lack of realworld applications and find texts difficult and not helpful in their learning. This is the
reason why he introduced GIS in his class. The result of using GIS is successful. Most
students accomplish more than expected at the beginning. Students have a deep
understanding of three key economics concepts; demand tastes and preferences,
market disequilibrium, and competition. This is the reason why the author named this
paper as increasing returns to scale. This paper could be an excellent guideline for
economists and lecturers showing how to use GIS tools in a class and what outputs we
could get. I believe economists should share their GIS experience via sharing papers like
this paper to encourage professors and students to learn and apply GIS to economic
fields.

3. Peterson, Kenneth D., 2000, using a geographic information system to teach

economics,
the Journal of Economic Education, vol. 31, no. 2. 169-178.

This is the first paper showing how to use GIS in an economics class. The objective of
this paper is to show the use of GIS in actual class to help lecturer and students to
enhance both the lecture and the experiential learning aspects of undergraduate
economic development, urban-regional, and poverty and discrimination courses. Major
application of GIS is basic skills of GIS such as mapping inter-temporal changes in an

economic indicator, inter-spatial variations by presenting color-coded or symbol-coded

thematic maps. For example, mapping unemployment rate over states from 1990-2000.
I think that since this paper published in 2000, there is a limitation of applying GIS in
economics due to limited understanding on GIS. However, his suggestion is valuable
things because visualization of economic indicator such as inflation rate over states,
unemployment rate, and GDP is very helpful for students to understand economic
phenomena in real world. More on that, mapping economic events could be a good way
to get a new idea and intuition behind the economic indicators.

4. A. Msuya, 2009, Using GIS to Analyze the Economic and Social Benefits of a
Flood Control Levee
in Mankato, Minnesota USA.

The purpose of this paper is to estimate the economic benefits of a levee constructed
for the purposes of flood damage reduction in Mankato, Minnesota. In addition, this
paper also analyzes the social benefits of the levee by assessing the demographic
changes such as population change, and land use change after the build of the levee.
The economic benefit is calculated by comparing the protection benefit gained from land
and property value of buildings and generating income from change of tax revenue
through decrease of flood damage with the construction and maintenance cost of the
levee. Benefit-cost analysis is used to estimate the current net property values. To
calculate the property value of flooding zone, GIS is used to sum up the property value
and damaged value using buffer tools. The bottom line of study is that the levee has
economic benefits which exceed the construction and maintenance costs.
This technique is an excellent example for analyzing the effect of policy complementing
Benefit-cost analysis using GIS and could be a reference to public economist to analyze
the policy. In the traditional benefit-cost analysis, simple calculation without simulation
using computer package is implemented. Usually, damages in the past flood were used
to calculate the future damage. However, by introducing GIS, we can simulate the flood
and calculate its damage. GIS analysis would be more realistic because flood is
simulated on the real map.

5. Henry G. Overman, 2006, Geographic Information Systems (GIS) and

Economics, the New Palgrave
Dictionary of Economics.

The one of distinguishing characteristics of GIS is that GIS provides algorithms for
analysis of spatial data. However, unfortunately, so far economists just use the created
map using GIS, and not use the spacial analysis tools and calculated values from GIS. In
this paper, the author introduces various GIS functions and tools which are useful in
economics.
He points out that GIS could be good method for the Industrial Organization and he
introduces the example of spatial competition for which the intensity of competition may
depend on the distance between firms. I have an experience of measuring spacial
correlations such as the average nearest neighbor, the general G statistic, and the
morans I function as a lab practice. These types of analysis of GIS are possible only in
GIS and they are very useful.
Moreover, the most interesting part of this paper is that there are new sources of data
produced in GIS. That is remote sensing from either satellite or aerial photography, or
digitized geological maps which can provide a huge amount of data on the earths
surface. Data on the surface of the earth can give an exogenous source of variation and
thus it would allow researchers to create instrumental variables form GIS.

6. Rosenthal et al., 2005, sthe attenuation of agglomeration economies: a

Manhattan skyline approach,
processed university of Toronto.

This paper introduces the application of GIS as an instrumental variables strategy. The
hypothesis of this paper is that Density of employment helps determine wages which is
useful in labor economics. As in the labor economy, the higher wages attract more
workers and cause higher employment densities. Here, higher density follows higher
wage, not vice-versa. The claim of this paper is that in one hand, the density of
employment will be determined by the height of buildings in Manhattan. However on the
other hand, the height of buildings depends on the geology of the site of buildings.
Hence, with these relations, there is a possibility that the underlying geology can be

used as an instrument for the height of buildings. In other words, some strong underlying
geology can have higher buildings, and again higher buildings could have higher
employment density and thus have higher wages. The authors use GIS data on the type
of underlying bedrock, seismic and landslip hazard as instruments for the density of
employment in the regressions of wages on employment density. I believe this paper is
the nice application of GIS in the economic fields and this would be a good reference for
the potential use of instrument variables from the GIS.

7. Overman, 2011, GIS a Job: What use Geographical Information Systems in

Spatial Economics?,
Journal of Regional Science.

The author argues that spacial analysis functions of GIS would be helpful for spatial
economists. More on this, GIS provides new type of data set which is both interesting in
its own right, but also as a nice source of exogenous variation. The author, Overman, is
the specialist in GIS and at the same time he is the economist. In this article, he
introduces various papers which applies GIS in economic fields such as Owen and
Cinderby (2007), Burchfield et al (2005), Donaldson (2009), Faber (2009), and Duflo et
al. (2007). He stresses that GIS help increase researchers understanding of the spatial
economy and GIS provides new types of dataset which is only available in GIS.
However, I still feel like that there is a big barrier for economist to learn GIS because
most of GIS labs or lectures focus on geology rather than economics. Thus, for
economist, sometimes learning GIS is thought as a wasting time because economist
can get a new econometric technique efficiently in the same limited time instead of
taking GIS lecture. However, as Overman mentioned in this article, GIS is clearly
Useful.

8. Neil Reil et al., 2009, chapter 2, GIS and Economic Development, [Planning
and Socioeconomic
Appplications], Springer.

This is the book, not a published paper. The authors starts with that GIS can be useful
to economic development practitioners working on the task of developing local
economies. The beauty of this paper is that this paper categories the GIS use by
economic development professionals; that is Economic impact analysis such as the
effect of a manufacturing plant closing down on the local economic and estimating the
monetary and employment impacts of public and private investments and events, Spatial
policymaking such as strategic plans for the project that identifies community
participation, a plan of action, Identifying potential cluster regions such as identification
of the spatial foot print of industrial clusters, Identifying critical social relations such as
examining social relationship among actors associated with economic development in an
area, and Web GIS such as servicing of local community data. In each section, the
author introduces previous researches, available data, process or methodology, and
example of analysis. This paper provides more detailed rich steps and examples of GIS
use in economics. I think this paper would be a good text book or references to learn the
GIS for economist. Here is the impressive statement that the speed at which data and
strategies can be coordinated is clearly changing the way economic developers approach
their job. I expect that GIS would be one of necessary economic tools like the SAS and
the Stata.