Research Notes on Spatial Economies

3D Perspectives for Analyzing Spatial Economies

KONDO Keisuke
Faculty Fellow


The remarkable development of information and communications technology (ICT) and distribution and logistics networks over recent years has had a tremendous impact on our daily lives. We can make instant communication with anyone anywhere in the world. In tandem with the rapid diffusion of online shopping, distribution and logistics networks for next-day delivery are being built and expanded. As we see and hear about those developments, we feel as if space is disappearing from the realm of economic activity. However, academic research is gradually revealing that space matters all the same in today's economic activity. Against this backdrop, I would like to discuss, in as plain a language as possible, topics of interest about spatial economics and their implications for government policies in a series of articles. In this article, I would like to introduce "3D" as a keyword in analyzing spatial economies.

Spatial economies as seen from 3D perspectives

Some readers might wonder what "space" means in the first place. Typically, "space" in terms of spatial economies refers to "geographic space" (Note 1). Then, how can we analyze geographic space? That is where the 3D perspectives come into play. The 3D represents three factors that play an important role in geographic space, namely, density, distance, and division. The World Bank's World Development Report 2009 (World Bank, 2009) uses this as the keyword that explains the transformation of economic geography. Indeed, academic research on spatial economies is closely related to 3D.

Let me explain the concept of 3D in more detail with Figure 1. In each regional economy, density is closely related to urbanization and land rents (economy of cities). Meanwhile, distance is a key factor in interregional trade (economy of regions). Furthermore, in international trade, not only distance but also divisions created by economic partnership agreements (EPAs) and free trade agreements (FTAs) have a significant impact (international trade). As such, although 3D is an important factor that affects economic activity, each dimension does not operate independently. In spatial economics, it is known that the human migration gives rise to spatial differences across regional economies. The reason why the migration plays such an important role is our dual nature as being both consumers and workers. This means that demand in consumption and labor as a production factor move simultaneously across regions. In cases where geographic distance matters a lot, it is not easy to transport goods to each region. A concentration of people in a certain region increases demand within the region, and a higher wage is expected by the production that takes advantage of economies of scale rather than from spatially dispersed production. At the same time, however, the concentration of people means a higher density, which works as a dispersion force through a rise in land rents. As discussed in Fujita et al. (1999), the spatial distribution of economic activity ultimately hinges on the balance between centripetal forces that attract people and centrifugal forces that disperse people.

Indeed, The Spatial Economy: Cities, Regions, and International Trade (Fujita et al., 1999) is an attempt to explain spatial differences in economic activity by taking 3D interactions into account and, as indicated by the subtitle, provides a coherent theoretical framework for understanding cities, regions, and international trade (Note 2).

Figure 1: 3D (Density, Distance, and Division) Perspectives that Define Space
Figure 1: 3D (Density, Distance, and Division) Perspectives that Define Space
Source: Created by the author.

Agglomeration of economic activity cannot be explained by natural conditions alone

Figure 2 shows the geographical distribution of population density in Japan. We can clearly see the concentration of population in a few metropolitan areas such as Tokyo and Osaka. Why does economic activity concentrate so much in certain areas? Spatial economics offers important insights into this question. To begin with, we need to understand the two concepts that are called "first nature" and "second nature" (Cronon, 1991).

Figure 2: Geographical Distribution of Population Density (Number of people aged 15 years old or older per square kilometers)
Figure 2: Geographical Distribution of Population Density (Number of people aged 15 years old or older per square kilometers)
Source: Created by the author based on data from the 2010 Population Census, Statistics Bureau, Ministry of International Affairs and Communications. The population density calculated here is spatially smoothed over neighboring municipalities located within the circle of 40 km radius from the centroid of a municipality. Certain regions are excluded.

Natural conditions are a major contributing factor for urban growth. Examples of advantageous natural conditions include the presence of a vast area of flat land, a situation favorable for trade, an environment fit for habitation, and the availability of abundant natural resources. Those exogenous factors are defined as first nature. However, when we look at the size of real-world cities, we find urban agglomerations that cannot be fully explained by such first nature. This is where the concept of second nature comes into play. As Marshall (1890) points out, increasing interactions of goods, people, and knowledge are what gives rise to the spatial concentration of economic activity. Such endogenous factors, which reinforce the attraction of cities, are called second nature. In other words, certain cities increase their size gradually through circular causality, i.e., as a concentration of people in a city increases its advantage over others, which in turn leads to a greater concentration of people.

Spatial economics is an academic field that successfully provides a theoretical explanation of such second nature, and Professor Paul Krugman is credited for opening up this new study field--also known as new economic geography--with his seminal paper (Krugman, 1991b). For this and a range of other related achievements, he was awarded the Nobel Prize in Economics in 2008 (Note 3).

An economy in which globalization and localization coexist

It has been pointed out that while economies are being globalized, they are also being localized at the same time (Fujita, 2011; Moretti, 2012). Indeed, while production networks for tradable products are expanding across national boundaries and those products are made available for consumption anywhere in the world, non-tradable services tend to be produced and consumed locally. The development of ICT and distribution and logistics networks certainly has enabled us to interact and trade with those in remote countries and regions wherever we are. However, it is also becoming clear that agglomeration has a significant impact on our economic activity. This suggests that there still are benefits from proximity. It is believed that the economy of density plays a critical role in the formation of human capital, promotion of innovation, improvement of productivity, and so forth (Note 4).

As shown in Morikawa (2014), service industries, which account for a large percentage of the gross domestic product (GDP) of advanced economies, are characterized by the simultaneity of production and consumption, and it has been found empirically that service-sector productivity is enhanced by the economies of agglomeration. Therefore, it is assumed that among 3D, density plays an extremely important role in service industries. We could also assume a circular causality in which the presence of a wide variety of services that are available only for urban consumers promote the localization of cities thereby attracting more consumers and resulting in higher productivity. As such, applying the 3D perspectives by also taking account of the characteristics of goods or services gives us sharp insight into spatial economies.

Concluding remarks

In this first in a series of articles, I have introduced 3D as an important perspective for analyzing spatial economies. In the subsequent series of articles, I will provide more detailed discussions by keeping 3D in mind. In the next piece, I will introduce academic studies exploring why wages are higher in big cities from the perspective of spatial economies.

November 10, 2014
  1. ^ As referred to in Fujita et al. (1999), this branch of economics differs from traditional economic geography in that it analyzes economic geography or spatial economies under the framework of the general equilibrium theory, a key analytical tool in economics, and it is thus referred to as "new economic geography" or "spatial economics." For an overview of spatial economics, see Fujita (2011). For the historical background and development of spatial economics, see Krugman (1991a) and Fujita (2010).
  2. ^ See Combes et al. (2008) for a detailed discussion of the theory and empirics on spatial economics.
  3. ^ For Professor Krugman's achievement, see the following site:
  4. ^ It should be noted that not everyone can enjoy the benefit from agglomeration and that agglomeration has its costs.
  • Combes, Pierre-Philippe, Thierry Mayer, and Jacques-François Thisse (2008) Economic Geography: The Integration of Regions and Nations, New Jersey: Princeton University Press.
  • Cronon, William (1991) Nature's Metropolis: Chicago and the Great West, New York: W. W. Norton.
  • Fujita, Masahisa (2010) "The Evolution of Spatial Economics: From Thünen to the New Economic Geography," Japanese Economic Review 61(1), pp. 1–32.
  • Fujita, Masahisa (2011) "Globalization and Spatial Economics in the Knowledge Era," RIETI 10th Anniversary Seminar, accessed on October 29, 2014.
  • Fujita, Masahisa, Paul Krugman, and Anthony J. Venables (1999) The Spatial Economy: Cities, Regions, and International Trade, Cambridge, MA: MIT Press.
  • Krugman, Paul (1991a) Geography and Trade, Cambridge, MA: MIT Press.
  • Krugman, Paul (1991b) "Increasing Returns and Economic Geography," Journal of Political Economy 99(3), pp. 483-499.
  • Marshall, Alfred (1890) Principles of Economics, London: Macmillan.
  • Moretti, Enrico (2012) The New Geography of Jobs, Boston: Houghton Mifflin Harcourt.
  • World Bank (2009) World Development Report 2009: Reshaping Economic Geography, Washington, D.C.: World Bank.
  • Morikawa, Masayuki (2014) Productivity in Service Industries: Empirical analyses using microdata, Tokyo: Nippon Hyoronsha (in Japanese).

November 10, 2014

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