Edited by Bernard Fingleton
Chapter 1: New Economic Geography: Some Preliminaries
Bernard Fingleton 1.1 INTRODUCTION The aim of this chapter is to illustrate important principles underlying ‘new economic geography’ (NEG) as a lead in to the varieties of economic geography on display in subsequent chapters. The classic work on NEG is Fujita, Krugman and Venables (1999), and this should, of course, be consulted for a fuller and more detailed account. The emphasis here is on explaining some of the normally taken-for-granted ideas and assumptions for newcomers to this ﬁeld. While the theory outlined here is well known, what is new about this chapter is the empirical application of NEG theory to real data for the UK regions, and the way in which the dynamics have been illustrated. 1.2 MICRO ASSUMPTIONS An essential feature of NEG is the way increasing returns to scale emerge from microeconomic foundations. Economists and geographers have long been aware of the signiﬁcance of increasing returns for spatial diﬀerentiation, and it is the basis of dynamic models of cumulative causation that were the precursors to the NEG.1 In elemental versions of NEG theory it is the consumer’s love of variety that is important as the determinant of increasing returns to scale. Our starting point is therefore a utility function in which there are two types of good, which we denote by M and C produced by M industries and C industries. We assume the Cobb-Douglas form, in which M is a composite index of goods produced under monopolistic competition. We use C to denote the consumption...
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