Thirty years have passed since a small group of theorists began applying concepts and tools from industrial organization to the analysis of international trade. The new models of trade that emerged from that work didn’t supplant traditional trade theory so much as supplement it, creating an integrated view that made sense of aspects of world trade that had previously posed major puzzles. The “new trade theory” – an unfortunate phrase, now quite often referred to as “the old new trade theory” – also helped build a bridge between the analysis of trade between countries and the location of production within countries. In this paper I will try to retrace the steps and, perhaps even more important, the state of mind that made this intellectual transformation possible. At the end I’ll also ask about the relevance of those once-revolutionary insights in a world economy that, as I’ll explain, is arguably more classical now than it was when the revolution in trade theory began.

About the work
Really, I don’t want to talk about me when the world is melting down, but I have had a number of requests for an informal explanation of what I got you-know-what for. So here’s an attempt.
It’s really about two related things: the “new trade theory” and the “new economic geography.”
OK, so what was the “old” trade theory? It’s what you probably learned if you took intro economics. Countries are different – they have different levels of productivity in particular industries, they have different resources, and those differences drive trade. Tropical countries grow and export bananas, temperate countries grow and export wheat. Countries with highly educated workers export high-tech goods, countries with less educated workers export shirts and pajamas.
The new trade theory starts with the observation that while this explains a lot of world trade, it also misses a lot. France and Germany sell lots of stuff to each other, even though they have similar climates and resources; so do the United States and Canada. What’s that about?

This paper develops a simple model that shows how a country can endogeneously become differentiated into an industrialized "core" and an agricultural "periphery". In order to realize scale economies while minimizing transport costs, manufacturing firms tend to locate in the region with larger demand, but the location of demand itself depends on the distribution of manufacturing. Emergence of a core-periphery pattern depends on transportation costs, economies of scale, and the share of manufacturing in national income.

For some time now there has been considerable skepticism about the ability of comparative cost theory to explain the actual pattern of international trade. Neither the extensive trade among the industrial countries, nor the prevalence in this trade of two-way exchanges of differentiated products, make much sense in terms of standard theory. As a result, many people have concluded that a new framework for analyzing trade is needed. The main elements of such a framework -economies of scale, the possibility of product differentiation, and imperfect competition- have been discussed by such authors as Bela Balassa, Herbert Grubel (1967, 1970), and Irving Kravis, and have been "in the air" for many years...

A monopolistically competitive manufacturing sector produces goods used for final consumption and as intermediates. Intermediate usage creates cost and demand linkages between firms and a tendency for manufacturing agglomeration. How does globalization affect the location of manufacturing and gains from trade? At high transport costs all countries have some manufacturing, but when transport costs fall below a critical value, a core-periphery spontaneously forms, and nations that find themselves in the periphery suffer a decline in real income. At still lower transport costs there is convergence of real incomes, in which peripheral nations gain and core nations may lose.

This article presents a summary of our conversation on the past, present and future of the new economic geography, which took place with the help of an interlocutor in San Juan, Puerto Rico in November 2002. Following the introduction, we explain what the new economic geography is, and we describe some basic models. The discussion of its various critical aspects is presented subsequently, and the article concludes with the discussion of future issues and challenges facing the field.

The standard model of New Economic Geography (NEG) presents a synthesis of polarization and neo-classical theories. Within a monopolistic competition framework it aims to explain processes of concentration and deconcentration of manufacturing in a two-sector economy. In this paper the effects of several assumptions of spatial agglomeration processes are addressed. In particular, we investigate the effects of transport costs for agricultural goods, spatial spillovers, the presence of non-tradable services and limited mobility of the labour force. It becomes clear that the tendency towards deconcentration of manufacturing is more marked
• the higher the transport costs for agricultural goods,
• the stronger the positive spillovers across the regions,
• the more income spent on services,
• the more limited the mobility of the labour force.

New economic geography provides an integrated and micro-founded approach to spatial economics. It emphasises the role of clustering forces in generating an uneven distribution of economic activity and income across space. The approach has been applied to the economics of cities, the emergence of regional disparities, and the origins of international inequalities.

This paper presents an overview of recent development in the new economic geography (NEG), and discusses possible directions of its future development. Since there already exist several surveys on this topic, we focus on the selected features of the NEG which are important yet have attracted insufficient attention, and also on the recent refinements and extensions of the framework.

China has in recent years capitalized on its huge, diverse population and geographical expanse to transform itself into the world’s most efficient assembler and exporter of a wide range of manufactured goods. In achieving this development, it has followed a strategy essentially based on the New Economic Geography, which explains how lower transportation costs and concentration of economic activities foster economies of scale and explosive urbanization. But now China’s transformation has reached a turning point. Various forces are starting to reshape China’s socioeconomic landscape in ways that should help harmonize its growth with that of the global economy and that will influence the answers provided to four major policy questions concerning growth, equity, and exchange rates that are now dominating the debate over China’s future. If China can build on its recent success in stimulating its economy to also put in place a more flexible exchange rate system that will allow the yuan to adjust gradually to market forces—as an additional tool to manage its economy—these four questions can be answered as follows:...

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Reshaping Economic Geography in East Asia
Edited by Yukon Huang and Alessandro Magnoli Bocchi - 2009

a companion volume to theWorld Development Report 2009, brings together noted scholars to address the spatial distribution of economic growth in Asia. It reveals how the new economic geography is reshaping development objectives: from initiatives to foster growth via enhanced agglomeration and connectivity to the world economy, to programs that channel resources to lagging regions. Key themes include how East Asian governments have dealt with agglomeration economies, urbanization, and regional disparities; improving connectivity with infrastructure investments; and eliminating barriers both inside and outside borders to favor the movement of labor, goods, and services. This volume will be of great interest to readers working in the areas of economic policy, poverty reduction and urban-rural development strategies, and transport-led infrastructure policy.

During a 13-year period extending from roughly 1995 to 2008, the world economy experienced an upheaval resulting from a great burst of globalization that brought the 20th century to a close. The new century is being ushered in by a second upheaval following a severe financial crisis that plunged the global economy into recession in 2008–09. Through an analysis of industrial trends, patterns, and national manufacturing capabilities that emerged after 1985, this volume examines the consequences of the first upheaval for Asia’s industrial geography and explores the likely outcomes of the second upheaval for industrial development and trade across the Asia region.
The first upheaval witnessed a massive migration of manufacturing industries and certain business services from advanced countries to developing economies. This migration transformed East and parts of South Asia into the industrial heartland of the world. The second upheaval, which could continue for a decade or more, will most likely consolidate Asia’s industrial preeminence; in addition, it could result in the redistribution and concentration of industrial activities in the two most populous and fastest-growing economies in Asia—China and India. The growth of Asia’s share of global manufacturing activities and major business services is already tilting the balance of economic power in Asia’s favor (Grether and Mathys 2006). In 1973, one-quarter of purchasing power parity (PPP) adjusted world gross domestic product (GDP) came from Asia while 51 percent came from the West. By comparison, as of 2003, Asia’s share had risen to 43 percent, surpassing the West’s 40 percent share (see table 1.1).

East Asia – a region that has transformed itself since the financial crisis of the 90s by creating more competitive and innovative economies – must now turn to the urgent domestic challenges of inequality, social cohesion, corruption and environmental degradation arising from its success.

America is just now starting to invent its post-recession economic future. The Great 2007–2009 Recession was the worst economic downturn since the Great Depression.1 That is not surprising since the two largest absolute annual privatesector employment losses since payroll statistics were first compiled in 1939 took place in 2009 and 2008.2 But what is surprising is that the Great Recession may also turn out to have been the great equalizer across the nation’s states and regions. A number of America’s former economic high-flyers were grievously wounded during the downturn and their weaknesses exposed. As a result, conventional assumptions about their future economic prospects—as consistent national growth leaders—may now come into question.

Each year since 1978, the Federal Reserve Bank of Kansas City has sponsored a symposium on an important economic issue facing the U.S. and world economies. Symposium participants include prominent central bankers, finance ministers, academics, and financial market participants from around the world. The participants convene to discuss the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion. 

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