Economic integration with an expanding labor market, agglomeration and trade

Agglomeration through the economies of scale it fosters influences trade, particularly in manufactured goods according to the new trade theory. This research focuses on the strength this agglomeration influence exerts on trade. A model of economic geography which is a variant of Krugman (1991(b)) and Krugman and Elizondo (1996) is modified to include an expanding labor market to explore the relationship between economic integration, agglomeration and trade. This modification has implications for later stage globalization. Norman and Venables (1995) find that goods trade alone is insufficient to equalize factor prices and begin the convergence of later stage globalization. They suggest that deeper integration with labor and capital mobility would also be needed to equalize factor prices. Simulations of the model re-emphasize the importance of transport costs in models of economic geography. Deeper integration may or may not lead to agglomeration depending on the level of transport costs. Reduced forms of trade equations with measures of agglomeration are empirically tested using distributed lag regressions and time-series methods. Estimation of the export regressions among OECD countries, the countries of the Pacific, Americas and the Middle East, and the 50 U.S. states show an expected positive relationship between agglomeration and exports. This positive relationship becomes increasingly significant as exports include larger portions of differentiated manufactured and capital-intensive goods, and as the economies become more open. Elasticities are used to interpret the effect of a percentage change in agglomeration on exports. There is evidence that with the present level of globalization, exports in goods & services is positively inelastic concerning agglomeration. Elasticities evaluated from trade regressions involving manufactured and capital-intensive goods data suggest a more consistent and elastic effect. As economies become more open, the effect agglomeration exerts on exports becomes even stronger. Agglomeration elasticities evaluated from the trade equations for U.S. states range from 1.02-1.24. F test results indicate strong support for a circular and cumulative causation growth process embedded in agglomeration in both the long- and short-run in U.S. regions. Agglomeration resulting from "secondary" infrastructure-led factors as opposed to "initial" industrialization-led factors appear to be dominating in both the long- and short-run.