DP3752 | Integration, Regional Agglomeration and International Trade

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In this Paper, we develop a two country four region model allowing for a core periphery pattern inside countries. We then examine how both the integration and the agglomeration process inside a given country affects the pattern of specialization and international trade. We also analyse how agglomeration process interact from one country to the other and in particular how agglomeration forces in one country is affected by the spatial distribution of activity in the partner country. The main results of the analysis are the following: (i) agglomeration proves to be a source of comparative advantages in the industries featuring economies of scale on condition that this agglomeration process is driven by market forces; (ii) both integration and agglomeration in one country reduces the likelihood to observe agglomeration in the partner country.