Chapter 2: Comparative Advantage and Regions
An
Alternative Reason for Cities to Develop
1. Central Place
theory describes a system of cities that would emerge as a result of scale and
agglomeration economies in a homogeneous plain with no interregional
differences in resource endowments or trade among cities of equal size.
2. We now drop the
assumption of a featureless plain and assume differences in endowments of
resources.
THEORETICAL PRICIPALS OF INTERREGIONAL FIRM LOCATION
The Principle
of Comparative Advantage:
1. The principle of
comparative advantage says that the value of total output that may be produced
in increased if subregions specialize in producing the good for which they have
a relative advantage and engage in trade.
2. Adherence to
this rule results in the nation being on, rather than inside, its production
possibility curve.
3. Trade occurs
when different regions have a different mix of inputs, even though one region
may have an absolute advantage over another in terms of all input endowments.
4. Although
comparative advantage is a rationale for trade, it is a rationale for cities
only if there are accompanying scale advantages in transportation associated
with city locations.
5. Scale advantages
for transport do accompany cities because they locate near waterways or ports,
and they have advantages in vehicles, rights of way, and facilities for loading
and unloading. Cities then become nodal trade destinations.
Location Decisions of the Firm
Motives for
location:
1. The profit
motive for business firms has as its purpose the choice of location that
maximizes the difference between total revenue and total production plus
transportation costs.
2. Other location
exists for households, churches, political organizations. We will focus on
profit motive for business location, especially producers of goods.
Inertia: Once established then
motives exist for no change. Why?
1. Reasons for
initial location may still exist.
2. Business ties
and cultural relationships evolve over time.
3. There is some
relocation risk. (Key personnel, market analysis, available resources, etc.)
Transport Cost
Oriented Firm's Location:
1. What determines
transport-oriented firm versus a production-oriented firm? Look at production
function and the cost of shipping inputs or outputs.
2. A high
bulk-to-value or weight-to-value ratio of transferable (versus localized)
inputs and outputs.
3. Some inputs are
ubiquitous (available everywhere) and do not need to be shipped.
One-Input, One-Market Model of Transport Oriented
Firm
Assumptions:
1. Only one
transferable input location that differs from one market location.
2. Transportation
costs are proportional to distance
3. The price of
inputs and products are given to the firm and unaffected by distance.
4. Therefore, firms
will maximize profits when they minimize transportation costs.
Figure Showing distribution and assembly cost based upon distance:
assembly costs
distribution
costs
M C
Ideal Weight = w x r x d for each
product determines the amount of transport costs.
1. Transport
oriented firms will locate where their ideal weight is the highest because this
minimizes its transportation costs.
2. Weight-losing
firms will locate at the materials site to minimize transportation costs.
(Lumber mill)
3. Weight-gaining
firms will locate at the market site to minimize transportation costs
(Bottling
companies)
4. Ideal Weights
Exert a Gravitational Pull when more than two locations are possible.
5. Technological
change can affect location decisions. Example is shipping of cattle to market
before refrigeration versus after refrigerated trucks. Weight losing process
was previously market oriented (ship live cattle to Chicago or Fort Worth) City
stockyards have since closed.
Why will the
firm choose an endpoint location?
1. Economies of
long-haul (sensitive to prices as transport costs increase and effect of
intermodal competition)
2. Lower terminal
costs of loading and unloading.
3. An intermediate
location could occur if changing transport methods. (Buffalo on the Great Lakes
as a center for flour manufacturing and distribution)
Production Cost Orientation
Reasons for
Demise of Transport Cost Importance:
1. Decrease in
importance of manufacturing
2. Technology has
lowered the cost of transportation more than other inputs.
3. The importance
of other localized production inputs are more important.
Labor Costs
1. What is a labor
oriented firm?
2. What determines
the cost of labor?
3. Why are wages
and salary differences not necessarily differences in wage costs.
4. What is the role
of unionization and "right to work" laws?
Quality of Life
1. How do
amenities affect the location decision of "footloose" firms?
2. Are amenities
really independent of compensation costs?
Taxes and
Goverment Incentives
1. Do they
ad to the efficiency of resource location?
2. Are they
essential for economic development?
3. How do they
relate to site costs?
Other location
Factors
1. Political
Stability among Nations
2. Energy Costs and
Availability
The Decision Making Process
The Role of
Profit Maximization
1. Non
profit organizations?
2. Management
versus share holder's benefits
The Role of
Uncertainty - Game Theory
1. Return is
the present value of future outcomes.
2. With subjective
probabilities of each potential outcome the entrepreneur could determine the
expected values of each choice.
3. Other goals are
maximum return, or minimum risk, or return subject to minimim income
constraint.
4. In reality, the
decision to locate varies considerably among potential firms based upon
benefits versus search costs and the use of other subjective criteria.
Steps in
Corporate Site-Selection Process
1. Need
Recognition. When do decisions take place during the life cycle of
the firm. Capacity needs, new products, new competitors, demand growth,
contracting versus integration.
2. Establishing
the Selection Team. Choice of consultants versus coreporate team. Role of
secrecy important.
3. Developing
Criteria. Needs versus wants. Tradeoffs between the ideal and available.
4. Winnowing and
Focusing. First cut in a broad region. Micro locational factors within a
region. Scoring systems by locational consulting firms.
5. Final
Decision. Formalized in capital budget and must show a sufficient
rate of return to be feasible
Criticisms of
large scale computer generated site selection models:
1. False sense of
vigor.
2. Fails to predict
future growth.
3. May ignored
specialized factors in favor of easily quantifiable data.
Changing Relative Importance of Locational Factors
How Useful are
Surveys?
1. Introduction
of respondent bias.
2. Only existing
firms surveyed.
3. Survey
instrument may not give enough choices.
Survey Findings:
1. Traditional
factors of location - labor, markets, transport costs, and materials remain the
most important, but their relative rankings have changed.
2. Traditional
factors are becoming relatively less important as a group in more recent
surveys.
3. Technological
change has reduced the importance of raw materials.
4. State and local
taxes are becoming more important.
5. There are more
locational factors considered.
REGIONS AND REGIONAL SHIFTS IN THE UNITED STATES,
1790 - 1990
Colonial Times:
1. Most
manufactured goods came from Europe, although a few small iron foundries
existed. Cities collected along the North Atlantic seaboard to collect and ship
grain exports in return for manufacturered imports. Production economies in
Europe more than offset higher transportation costs from relatively cheap ocean
transport.
2. The growth of
cities and decline in overland transport cost in the first half of the nineteenth
century led to the feasibility of manufacturing in the north, because of the
higher concentration of people. This concentration was due, in part, to the
different transport technologies for exporting grain in the North versus
tobacco in the South. Grain could be more economically shipped because of its
higher value to weight ratio, while tobacco with a high bulk to value ratio was
shipped more directly from Southern ports and inland rivers.
3. Water power was
also more prevalent in the North, so that Northern colonial cities flourished
as a result of exploitation of some exportable resource. Boston exported fish,
New York exported furs, and Philadelphia and Baltimore exported wheat. Contact
with Europe was more important than contact with each other before the
development of import substitution in the early nineteenth century.
4. By 1810 import
substitution was well underway in the Northern cities, but not in the South. By
1850 the South was an importer of manufacturered goods from the North.
5. The War of 1812
futher cut off reliance upon British goods. Flooding of US markets by British
goods during the Revolution and, again, during the War of 1812 through New York
City led to the emergence of NYC as the premier American city rather than
Philadelphia.
6. Part of the
prosperity in NYC resulted in investment in the Erie Canal. The Erie Canal and
packet service for scheduled transatlantic shipping placed NYC as
the commercial center of the America and paved the way for the emergence of
economies of scale in manufacturing.
7. Pittsburg is
another city that emerged as a commercial center founded as Fort Duquesne by
the French on the upper Ohio River. As early as 1820 it began to sprout
foundries, glass factories, and machine shops, all evidence of import
substitution that enhanced economic growth.
8. Between 1890 and
1940 the adoption of electric power and later on the internal combustion engine
culminated almost 50 years of innovations that revolutionized interregional
transport. The changing location pattern of cities was intimately connected to
these innovations.
9. The first of
these innovations was the Erie Canal that pushed the fall line of New York city
to Detroit and, ultimately, Chicago. This greatly expanded NYC's hinterland.
The Erie Canal did
for NYC and Detroit and Chicago what the steamboat did for New Orleans and St.
Louis. The importance of St. Louis was further enhanced by the opening of
navigation between the Mississippi and Chicago.
10. Navigatable
water routes were the primary access to the outside world until the Civil War,
and they were the primary determinant of a city's ability to develop a trading
hinterland.
The Railroad Era
and Beyond
1. The railroad
significantly lowered the advantage of water as a medium of bulk transport.
2. With the
railroad East-West transport across the country became feasible, and within
fairly broad limits railroad could be built anywhere.
3. City founding
fathers became instrumental in persuading (bribing) railroad officials to
locate at a particular city. Kansas City rather than Leavenworth developed as a
meat-packing center after the Hannibal and St. Joseph was persuaded to run
through the city in connection with the Union Pacific.
4. Railroad barons
held the future of Western city location in their hands. Water based cities
Chicago and St.Louis flourished after railroad links developed during the
second half of the nineteenth century.
5. Until 1940 the
South did not challenge the Northeast in manufacturing because of greater scale
economies and the more fully developed railroad network in the more densely
settled region. Industry did not move southward despite lower wages and low
skilled southerners did not migrate northward to obtaining higher skilled jobs
that were being filled by immigrants. Hence, a wide divergence of income
existed between the Northeast and the South Atlantic states.
6. Initially, in
the West higher wages were necessary to compensate for relatively scarce labor
and the higher cost of imported goods. High wages induced migration and growing
population in the West, so that by 1910 the West was growing faster in both absolute
and relative numbers of people than in the Northeast. Eventually, higher
population growth resulted in economies of scale and import substitution that
generated even more jobs.
7. The development
of the West robbed the Northeast of one of its major export markets and,
recently, its relative population growth. Until 1970 outmigrants from the
Northeast to the West were replaced by immigrants from Europe and, during the
1960s, immigration of Southern blacks (beginning with the Great Depression and
WWII).
8. Beginning in the
1970s the wave of migration by blacks from the South to the Northeast stopped
and, in fact, about one-third returned to the South or to the West. The West
closed any scale disadvantaged versus the Northeast after World War II.
9. While the
Northeast and West patterns were in progress, the South languished in the
aftermath of the Civil War and Reconstruction for many decades. The industrial
wakening of the South began with the dramatic shift out of agriculture after
the 1940s. The migration of Blacks to the Northeast was a combination of push
and pull. Push from the loss of agricultural jobs and pull by the slowing of
European immigration.
10. The original
attraction of manufacturing into the South was in response to relatively low
wage rates and lack of union organization.
11. The flight from
the Northeast to the Sun Belt was in response to more predictable sources of
energy following the mid-1970s energy crisis. Highly skilled whites moved from
the midwest to Houston and other oil based cities.
12. While income
convergence continued until the 1980s, there was an increase in the divergence
of income that rose rapidly in the early 1980s. Two hypotheses are advanced to
explain this divergence of income:
a. The oil
producing states suffered at the hands of the oil consuming states in the
1980s.
b. The development
of high technology defense related industries increased the divergence of
skills among regions of the country.