Geographic Change with Trade Based on Comparative Advantage
This article describes a multimarket von Thünen model that concerns change in the internal economic geography of two countries once trade develops between them. Using the principle of comparative advantage, an initial allocation of four industries is established across each of the countries based on local variation in factor endowments, regional demand at several centers, and internal transport costs. Once trade begins, reallocation of production in the four industries in each country is modeled as the response to comparative factor endowments across the countries, trade costs, transport costs, and differences in demand. The model's results indicate that geography matters in trade both within and across countries. Proximity is especially important. Regions of the trading countries that are effectively neighbors are affected more by the introduction of trade than are regions that are peripheral in the true geographical sense. At the national scale, results suggest that a high tariff in one country can raise aggregate production and distribution costs in another country.
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