How Important is Technology? A Counterfactual Analysis

The multiplier effect of total factor productivity on aggregate output in the one-sector neoclassical growth model is well known, but what about the effects of regional productivity levels on the aggregate output as well as other national and regional variables? This paper studies the impact of productivity changes in the goods sector and the transportation sector in a general equilibrium trade model where agents in each location produce different varieties of a common set of goods. Wages are assumed to be equalized in nominal terms across locations, with differences in purchasing power (due to trade costs) offset by agents' preferences for particular locations in the initial steady-state. Instead of assuming iceberg costs, a transportation sector is modeled to allow an efficient distribution of workers across the production and transportation sectors. The state level data from the U.S. support the model, and the comparative statics exercises have several implications on the national and state-level variables of the U.S. economy. It is shown that if the national production technology level (i.e., the production technology level in each region) is doubled, the national output increases by 5 times, the price dispersion across regions increases by 20%, the population dispersion across regions decreases by 1%, and the ratio of production labor force to transportation labor force increases by 10 times. As the transportation costs approach zero, the national output increases by more than 10 times, the price dispersion across regions decreases by 20%, the population dispersion across regions increases by 1%, and the ratio of production labor force to transportation labor force increases by 5 times.