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Econ 366 - Chapter 2

Econ 366 - Chapter 2 - URBAN ECONOMICS MILLS HAMILTON 5ed...

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URBAN ECONOMICS MILLS & HAMILTON, 5ed CHAPTER 2 COMPARATIVE ADVANTAGE OF REGIONS
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THEORETICAL PRINCIPLES OF INTERREGIONAL FIRM LOCATION DECISIONS A. PRINCIPAL OF COMPARATIVE ADVANTAGE If two regions differ in their RELATIVE abilities (Cost of Producing) two goods, the value of Output is Maximized if the Region that is RELATIVELY BETTER AT(HAS A COMPARATIVE ADVANTAGE IN) specialized in producing that good. True even if the other region is better at producing the other good in ABSOLUTE TERMS
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1 2 3 2 1 1 0.5 1 2 3 3.5 3 2 1 Region 1 Region 2 Combined regions
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Comparative Advantage => a reason for trade between regions => trade occurs if CA > transport costs => scale economies in transport give rise to ‘trade between regions’ rather than merely ‘trade between agents in different regions’.
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FIRM LOCATIONS WHEN REGIONS DIFFER Cost Considerations A. Production Cost Oriented Firms: (textiles) transport cost low relative to total cost (light in weight relative to value Production process intensive in some input for which there is a geographic variation in cost (labor, energy) Textiles – light in weight relative to value and intensive in unskilled labor which is much cheaper in low-wage regions. Move from North to South when steam power freed it from water power requirements. More recently moved to developing countries
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B. Transport Cost Oriented Firms (steel, beer) transport cost is a large fraction of total cost – input or output is
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