Last week the Nobel Foundation awarded the Nobel Prize in Economic Sciences to Paul Krugman for his analysis of trade patterns and location of economic activity. A good summary of his work can be found in the post About the work in The New York Times. In his own words the New Trade Theory explains patterns of trade:
…the broad pattern of what countries produce is determined by things like resources and climate, but there’s a lot of additional specialization due to economies of scale, and there’s much more trade, especially between similar countries, than you would expect from a purely resource-based theory.
And on the impact of mobility of labor and capital:
Think of Henry Ford and his Model T. He could have established many factories, spread across the country, to be close to his customers. Instead, however, he found that it was worth incurring extra shipping costs to achieve the economies of scale of one big factory in Michigan.
And once you’re concentrating production in a limited number of locations, which locations will you choose? Locations where there’s a large market – which will be locations where lots of other producers have also chosen to concentrate their production.
While [...]
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