Increasing Returns and Economic Geography with Solow-Uzawa, Dixit-Stiglitz, and Krugman Unified

Abstract

The purpose of this study is to study interdependence between growth and economic geography. We build a two-regional growth model of endogenous wealth under perfect and imperfect competition by integrating the three basic models – the Solow-Uzawa growth model, the Krugman two-region model, and the Dixit-Stiglitz imperfect competition model – in economic theory. The economy in our approach is composed of three sectors – the capital goods sector as in the Solow one sector, the consumer goods sector as in the Uzawa model, and the intermediates sector as in the Dixit-Stiglitz model. The economy is composed of two regions as in the Krugman two-region model with intermediates produced in the two regions under imperfect competition. The household behavior is modelling by synthesizing Zhang’s concept of disposable income and utility function and the Dixit-Stiglitz concept of composite good and utility function. We build and simulate the model. We identify existence of equilibrium. We examine effects of changes in some parameters on economic geography. We examined the effects of changes in some parameters on economic geography. For instance, we showed that as the transportation cost falls, the population is more concentrated on one region, the numbers of varieties of intermediates are reduced, the output level of each firm in the intermediate sector is increased, the household consumes more each intermediate good, and prices of all intermediate goods are reduced

Keywords

• krugman’s two-region model
• solow model
• uzawa model
• dixit-stiglitz model
• monopolistic competition
• wealth accumulation