An Introduction to Quantitative Spatial Economics

And why we should spend more on highways

The study of trade has traditionally constrained itself to highly abstracted and aggregated trade flows between countries, but there is no a priori reason why this should be the case. The same analytical tools needed to study the movement of goods across country borders can also be applied to state borders, to counties, or even to city blocks. Doing so allows us to answer questions of astonishing specificity – we can simulate the impact of new transit links, evaluate how much to spend on highways, or find the optimal network of roads – but it is only in the past few years that we have begun to do so.

This article will teach you urban economics from the beginning to the very cutting edge. We will first cover the foundational models of spatial general equilibrium, then show how developments first developed for the study of international trade gave them empirical relevance. We shall then take a tour of all the wonderful things you can do with quantitative spatial equilibrium models, and conclude with what policy lessons they have for us. In particular, I believe that we should spend more on all forms of transport infrastructure, including and particularly highway infrastructure.

The first model of economic activity in space is that of Heinrich von Thunen’s, way back in 1826. In Paul Samuelson’s view, von Thunen’s “The Isolated State” was a tremendous achievement – containing the first articulation of a general equilibrium model, the birth of marginalism, and much modern trade theory – and places him in the “inner ring of Valhalla” alongside Walras, Mill, and Smith. Mr. von Thunen was an autodidact, who worked out his ideas over many decades while working as manager of land in Mecklenburg. Much of the book is concerned with practical matters of cultivation, and his better remembered theoretical contributions to economics were made in the effort of making actual empirical predictions. Nevertheless, we shall skip those. (I say this only to note that I came away extremely impressed with his work while doing research for this post). While he was one of the first to use calculus to derive equilibrium (the first?), its essentials can be understood without algebraic encumbrances.