core and periphery model | core model

 Briefly explain the core and periphery model. 

Ans. The Core-periphery model, developed by Krugman in the year 1991 has sparked a new and rich stream of literature known as the new economic geography (NEG). In a way analogous to the Krugman model, which showed the existence of international trade in the absence of comparative advantage, the core-periphery model shows that agglomeration may emerge even in the absence or exogenous difference between locations. Suppose, there are two regions, two production sectors (agriculture and manufacturing) and two types of labour (farmers and workers). The manufacturing sector produces a continuum of varieties of a horizontally differentiated product; each variety is produced by a separate firm with scale economics, using workers as the only input. The agriculture sector produces a homogeneous good under constant returns, using farmers as the only input. Workers are freely mobile between regions; whereas farmers are immobile, distributed equally between the two regions. Finally, the trade manufactures involves a positive transport cost (in an iceberg form). In this model, the immobility of farmers is a centrifugal force because they consume both types of goods. The centripetal forces is more complex, involving a circular causation. First, if a large number of firms locate in a region, a greater number of varieties are produced there. Then, workers (who are consumers) in that region have better access to a greater number of varieties in comparison with workers in the other region. Thus, (other things being equal) workers in that region get a higher real income, inducing more workers to migrate towards this region. Secondly, the resulting Increase in the number of workers creates a larger market than the other region, which in turn yields the home market effect (HME) familiar in international trade (Krugman, 1980).

That is, because of scale economies, there is an incentive to concentrate the production of each variety in only one region; because of the transport cost, (other things being equal) it is more profitable to produce in the region.