Rank Size

Assignment 2
Chapter 7
Innovation, Trade and Location 1
Models vs. reality
Core model gives a long-run equilibrium of
either complete agglomeration or spreading.
Agglomeration stronger than spreading
Krugman model (racetrack economy).
Agglomeration dominates.
Economic concentration in one or few locations.
Distribution of economic activity is evenly spread.
What do we observe in real life?


Innovation, Trade and Location 2
Urbanisation
Urbanization share of 75 per cent or more in
developed countries, Latin America and some
oil-exporting countries.
In countries we find multiple centers of
economic activity with various size
Not as some economic models describe it
A central topic within urban economics is the
analysis of urban systems.
Innovation, Trade and Location 3
Congestion
Congestion and urbanization goes hand-in-
hand.
Congestion sums up the negative aspects
coming from urbanization:
Limited physical space
Heavy usage of roads
Communication channels
Limited local resources
Environmental pollution

Innovation, Trade and Location 4
Cities, raison dtre
Increasing returns to scale
Marshall
Natural advantages
Home market effects
Consumption externalities
Political factors
Rent seeking

Education versus creative class
Human capital theory: a city with more human capital
will grow more rapidly
Innovation, Trade and Location 5
Extent of underlying economic forces
Industrial scope.
This deals with the strength of agglomeration economies
and if it extend across all sectors in a city.
Localization versus urbanization
Temporal scope.
Time aspect.
Geographic scope.
Closeness to other cities and the economic density within
the own city.
Organization and business culture/compitiveness
scope.
Competitive environment stimulates growth.
Innovation, Trade and Location 6
Knowledge spillovers between firms
Marshall-Arrow-Romer (MAR)
Between firms that belong to the same industry
City size due to specialization
Localization externalities
Jacobs
Not industry-specific, between firms belonging to
different industries.
City size due to diversity
Urbanization externalities

Innovation, Trade and Location 7
City size distribution
Differences between cities arises due to the
way positive externalities influnce cities.
Existence and growth of cities is mainly due to
increasing returns to scale.
These explanations are not very informative
when it comes to explaining the city size
distribution.
Since focus has been on the growth of indiviudal
cities and not their interdependence.


Innovation, Trade and Location 8
Urban systems
Core urban
system model
(Henderson)
Core geographical
economics model
(Krugman)

Innovation, Trade and Location 9
Core urban system
External scale economies are
industry specific.
Localization economies.
No transport cost
Market potential is not an issue
Geography is not part of the
analysis.
The hinterland is not included
in the analysis.
Spreading force: congestion
Focus is on what determines a
citys size and the
interdependence among cities.
Systems of cities is due to need
of different industries.
Each industry has its own
optimum size.
Cities specialize and trade with
each other.


Core geographical model
External scale economies
consist of pecuniary
externalities.
Manufacturing firms have
internal economies of scale.
Transport cost
Market potential
Innovation, Trade and Location 10
Henderson vs. Krugnman
Agglomeration
Urban system model: pure local increasing returns to scale (no
transport cost).
Geographical economies model: pecuniary external economies
of scale (transport cost).
Wage
Urban system model: a function of the labor force.
Geographical economies model: does not have to be a function
of the labor force.
Cost of living
Urban system model: a function of the labor force (positive).
Geographical economies model: a function of the labor force
(negative).


Innovation, Trade and Location 11
Conclusion, Henderson vs. Krugman
Krugman is more applicable at a larger spatial
scale (regions, countries).
Market access, spatial interdependencies between
locations more important.
Broad trends at large spatial scales.
Henderson more relevant for smaller spatial
units (cities).
Local externalities most important.
Spikes of economic activities.

Innovation, Trade and Location 12
Geographical economics, congestion
Congestion: external diseconomies of scale
As cities grow:
Increased commuting cost
Increased rents
Increased environmental pollution
Limited storage facilities
Innovation, Trade and Location 13
Geographical economics, congestion,
continued
Congestion cost is a function of the overall size
of the location.

1
+

; 1 < < 1

Innovation, Trade and Location 14
Short-run equilibrium of the core
model with congestion
Income equation (not affected by congestion, )
Wage equation (increase in the share of
manufacturing workers=> increases
congestion=>reduce the wage rate in city r)
Other cities more attractive
Price index equation (as the wage rate in city r
decrease=>reduce the price index in other
regions)
Other cities more attractive
Innovation, Trade and Location 15
Long-run equilibrium of the core
model with congestion
Two-city model with congestion
Since the aim is to explain the distribution of
cities, a two-city model will not do
=> Racetrack model with many cities and congestion
Focus on the relative real wage of city 1
compared to city 2
Can from this determine the direction of change
of the distribution of the labor force
=> Gives the stability of long-run equilibria.
Innovation, Trade and Location 16
Long-run equlibrium:
Relative real wage is equal to 1
All employees agglomerated in one city
Long-run with congestion:
Small congestion forces alters the possibilities for
long-run equilibria.
High transport cost: spreading
Decreased transport cost: spreading+partial agglomeration
Decreased transport cost: complete agglomeration
Small transport cost: partial agglomeration
Very low transportation cost: spreading
Conclusions:
Wider range of possible long-run equilibrium
outcomes with congestion
Partial agglomeration is possible=> cities of different
sizes can coexist

Innovation, Trade and Location 17
Many locations and congestion, long-
run equilibrium
Many locations have manufacturing production
Cities varies in size
The distribution of manufacturing activities is
structured around two centers.
If a city increase or decreases depends on its
relative place in the initial distribution of cities
Size of the neighborhood cities
Isolated: shrinks
Cluster: grow
Surrounded by large cities: grow
The importance of the path dependence (history)
varies.
Innovation, Trade and Location 18
City size distribution
There is an uneven distribution of economic
activity in many countries and the distribution
have some regularity features.
The Rank-size distribution have gained
empirical success for many countries=> there
is a well-ordered pattern underlying the
distribution of economic activity.

Innovation, Trade and Location 19
Zipfs Law
Also called rank size rule
A special case of the Rank Size distribution.
Stating that the largest city is twice as large as
the second largest city, five times as large as
the fifth largest city etc.
Innovation, Trade and Location 20
Zipfs Law, measured
1. Collect data on the size of all cities in a particular
region (normally a country). Size can be defined
in numerous ways, one is by the inhabitants
(www.scb.se).
2. Order the observations in decreasing size.
Their rank
3. Take the natural logarithm of the rank and the
size.
4. Log(M
j
)= log (c) qlog(R
j
)
5. Log(R
j
-0,5)= log (c) qlog(M
j
) (chapter 1)


Innovation, Trade and Location 21
Zipfs Law, measured
Zipfs law holds if and only if, q=1, why?
Empirical studies for the US have confirmed Zipfs
law and also that it is stable over time.
Estimation problems:
OLS is biased and inefficient.
Small cities do not follow the rank size distribution.
How to define a city.
The largest city (rank 1) is much larger than what
Zipfs law predict (primate city).
Innovation, Trade and Location 22
Assignment
Calculate Zipfs law for your home country.
make sure that you make clear how you define a
city, how you measure the size of the cities and
what cities you use.
Choose two years so that you can make an
comparison of your results (preferably more
than 3 year timespan).
The assignments should be approximately five
pages and no more than seven pages, in total.


Innovation, Trade and Location 23
Practical information
The deadline for this assignment is on the 14th of
March, 17:00.
The assignment shall be handed to me in paper-
form, not by e-mail. There will be a box outside
my office where you shall hand-in the
assignment.
The assignments can be written in groups of two
or alone.
The assignment gives 1,5 hp.
If you miss the deadline, the highest grade you
can get is C (79).

Innovation, Trade and Location 24
Structure
The assignment should have a similar structure to a thesis;
an introduction,
theory part (explain why cities exist but also why cities of different
sizes coexist),
Background with some information about the country, number of
inhabitants, population density, number of big cities etc.
method part (Zipfs law),
analysis, and
concluding section.
References shall be included and referred to in a correct manner.
In the text: Geographical economics is important (Brakman et al, 2009)
Reference list: Brakman, S., Garretsen, H., and van Marrewijk, C. (2009), The
new Introduction to Geographical Economics, Cambridge University Press,
New York

Innovation, Trade and Location 25
Urkund
The assignment shall be send into Urkund,
Mikaela.Backman.jibs@analys.urkund.se
in order to pass.
If you have any questions do not hesitate to
contact me: mikaela.backman@jibs.hj.se,
036-101746, B5010



Innovation, Trade and Location 26