International Factor Mobility and Dynamic Paths

Abstract

The aim of this paper is to consider the adjustment process of the spatial structure in a two-country economy where both labor and capital are mobile. For this purpose, we combine the model of New Economic Geography with the phase diagram technique. We show that the agglomeration processes are not always monotonic since the mobile factors interact with each other. More specifically, even when both factors are eventually agglomerated to one country, it is possible that labor and capital move in opposite directions in the adjustment process. Differences in factor endowment ratio and market size play significant roles in this transition path.