An Application of Economic Interaction Models to the Analysis of Spatial Effects of Economic Integration

Classical partial-equilibrium analysis of integration in a spaceless world is extended by introducing the spatial dimension into the model. It is argued, however, that this model, owing to its unrealistic homogeneity assumptions, generates an extremely rigid response by the endogenous variables to tariff reductions. Therefore two approaches are discussed for introducing heterogeneity into the model: A deterministic utility-maximization approach and a probabilistic choice approach. Both approaches lead to a substitution of the transportation model, which is embedded in the homogeneous model, by a trade-distribution model of the gravity type. In the framework of this model, regional shadow prices are derived which play the same role as the shadow prices of the transportation model and can be used for measuring the impact of economic integration on regional access to input and output markets. Finally a family of elastically constrained gravity models is considered, which are derived by linking price-elastic supply and demand with the trade-distribution model. These models can be empirically applied for calculating simultaneously the effects of tariff reductions on regional supply and demand as well as on interregional trade.