Urban Diversity and Economic Growth

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Here is my summary from the Journal of Economic Perspective. 

By: John M Quigley

 Four periods of intense study of cities by economists.

1)      The first of these periods occurred in the decade after World War I,

·         Only about 10 years after the truck revolutionized the transport of goods within urban areas

·         Include the systematic empirical analysis of the force affecting the location of the firm and households within cities

·         Robert Murray Haig, à considerable attention to the “where things” belong to urban area, providing the first systematic economic analysis of urban spatial structure

·         The introduction of truck , meant that garment could be transported cheaply throughout the region and exported

2)      The second, began in the mid-1960s

·         It formalized many of the insight about location incentives within urban areas which had been uncovered a half century before,

·         There is a theories about agricultural crops and land values, and applied them to the household sector

·         William Alfonso and John Kain (1962), exemplified new approach, in the world of identical household, all would be indifferent among residential locations within the city, since spatial variations in housing prices would equalize utilities.

·         Differentiation in the population would lead to predictable differences in location patterns, as land prices with distance to the urban center arises from a residential equilibrium (higher income households live further from downtown and commute longer distance), but consume more housing in less dense accommodation.

·         The poor outbid the rich, for central location with higher housing and land prices because they consume only small quantities of housing services.

3)      The third, advancement in our understanding of cities also arose from intensive analysis of the NATION’s primary city.

·         There is a lot of research about city, the first research is in New York. The research doing by intensive study of the fundamental factors affecting the development of industry and localization on economy activity.

·         Use of concept external economies of scale (notion that some firms can achieve cost savings when they operate in the context of a larger local economy)

·         The summary (Raymond Vernon) 1962, “rise and spread of external economies” and the impact of these externalities on firm and the well-being of central cities.

·         It is obvious that external economies reduce the cost of doing business just as labor and transport (saving) do.

Point of view

          Cities have internal heterogeneity and diversity which affect the growth of economy in analogous ways.

          Firms producing nonstandardized differentiated output were more strongly attracted to the urban core than those firms producing homogenous products

          Benjamin Chinitz (1961), an urban environment with many firms producing heterogeneous output is more conductive to economic growth than an environment  dominated by a few large firm or a single industry (New York and Pittsburg during the postwar period.

 Implication of Agglomeration

Concept of agglomeration is getting sharp and differentiated over time. Many argument which put forward in a recognizably modern form by Aflred Marshall.

1)      Scale economies or indivisibilities within the firm, the historical rationale for the existence of cities in the first place.

2)      Shared inputs in production and consumption, encompasses the “economies of localized industry” as well as its consumption analogue.

3)      Transaction cost, better matching between workers skills and job requirement.

 Theoretical Models of Heterogeneity

The utility of household in the city will be positively related to the aggregate quantity of local goods it consumes and the number of types of these goods which are available in the economy.

Diversity and variety in consumer goods or in producers inputs can yield external scale economies, even though all individual competitors and firms earn normal profits. (erda)

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