THE NEW ECONOMIC

GEOGRAPHY THEORY
by Paul Krugman
AND OUR PROPOSED
ECONOMIC THEORY
ENCLONA ADOLFO VERGARA EULALIO TERNIDA FORTUNO
MEB31
INTRODUCTION
INTRODUCTION

Paul Robin Krugman

 New economic geography provides an integrated and micro-
founded approach to spatial economics. It emphasizes the
role of clustering forces in generating an uneven distribution
of economic activity and income across space. It is a study of
location, distribution and spatial organization of economic
activities in the world. It has variety of approaches to
different subject matters, including the location of
industries, economic agglomeration, transportation,
international trade and real estates. And also it is involve in
the relationship between the economy and environment. The
approach has been applied to the economics of cities, the
emergence of regional disparities, and the origins of
international inequalities.
 One topic involved in the new economic geography of
Krugman is the supply and demand of products in a
country. Different factors affect demands and supply
such as price of production, number of producers,
climatic condition, and lower taxes and increase in
government subsidies. This research paper aims to show
how the location of the producer can be a factor that
affects the demand and supply of products in a country.
It would clarify if the changes in demand and supply is
due to the change in price or if the location where the
products are being produce would also affect the supply
and demand of the people in a country.
CHAPTER II: ECONOMIC THEORY
THE NEW ECONOMIC GEOGRAPHY, (NEG)
theory by Paul Krugman
economic geography is about the location of production in
space; in other words, it is a branch of economics that worries
about where things happen in relation to one another. In
investigating the patterns of location of production in space,
Krugman uses complex economic models in which geography
(often simply in the form of transport costs) is inserted as an
important factor. In this way, Krugmans NEG has much in
common with neo-classical location theory.
Theoretical techniques in Theoretical economic
geography explain number of phenomena such as:

The clustering of people and businesses into cities.

The location of major population centers, which is often based on
proximity to trade routes. For example, most major cities are located in on
harbors.
The distribution of people and businesses within cities with higher
density in the centers, reducing to lower density on the fringes.
The distribution of populations across land masses, with major cities,
interspersed with regional centers which are in turn interspersed with smaller
towns.
The clustering of similar businesses together.
Practical application of NEG:
The New Economic Geography (NEG) incorporates social space
into neoclassical models, and claims to provide an explanation of
uneven development within the parameters of economic
orthodoxy.
It is among the most influential recent innovations in
mainstream economics Paul Krugman was awarded the 2008
Nobel Prize in Economics for his contributions to the NEG, and it
provided the theoretical inspiration for the World Bank's 2009
World Development Report. Drawing on the work of David Harvey
and Henri Lefebvre, this article interprets the NEG as a
colonising project in both its theoretical claims and its practical
applications.
 Theoretically, the NEG colonises the disciplinary terrain of economic
geography while replacing its substantive content with the abstractions
of neoclassical economics. In practical terms, the NEG has been
instrumental in the World Bank's new spatial approach to development,
which aims to fully colonise peripheral regions of the global economy
through constructing the spatial infrastructures necessary for globalised
production and exchange.
The social contradictions implicit in this project are revealed in the
case of the Plan Puebla Panam, a regional development programme for
southern Mexico and Central America, based on the NEG, and identified
by the World Bank as a prototype for its spatial approach to
development.
NEG is a theoretical approach and as a policy tool, demonstrating the
increasing significance of the production of space within the neoliberal
project, and cautioning against the transformation of socio-spatial
reality in the image of technocratic abstractions.
Assumptions of new economic theory
Economic geography tries to answer questions
like: Can we expect convergence between
different economic areas or, instead, a more
agglomerated pattern of economic activity at the
regional and global levels? What will be the
impact on international trade of the fading of
national borders? What is the role of cities in the
growth and trade processes? How will increased
openness to trade and factor mobility affect
policy making?
 The logic of modern economic geography models, in which trade
and factor mobility are often complements, and factor movements
often lead to divergence in factor and even goods prices, is
something that Ohlin realized could happen, but it ran counter to
his main theme. The new economic geography has in common
with the new trade theory the features of increasing returns and
multiple equilibria, as well as the technical tricks needed to make
the models tractable. However, there is a difference in emphasis
the trade models were largely focused on internal economies of
scale, while geography is largely about external economies
(Krugman 1995b). The major breakthrough of the new economic
geography relative to the traditional location theory consisted in
including in the concept of geographical advantages the economic
advantages that result from the interaction of economic agents,
along with the traditional physical ones.
 Krugman (1998a) recognizes, economic geography models
deal with very complex realities, leading to complex
solutions.
However, the arbitrariness of industrial location found in
the new trade theory is maintained in the new context
(Krugman 1991a, 1991b, 1991c). In addition, this
literature, together with Krugman (1991d), also
emphasises the importance of history and expectations in
explaining observed patterns of industry location and
growth, supporting the work of David (1985) and others.
 four mechanisms leading to circular and cumulative spatial
concentration of economic activities: labour migration, input-
output linkages due to intermediate goods, factor accumulation
and inter-temporal linkages, history and expectations.
In general, trade is both influenced by and in turn influences
the process of geographical industrial specialisation within
nations. Further links between trade and the new economic
geography are provided also in the urban systems version of the
new economic geography. Suppose two cities equidistant from
international markets, one of which concentrates all production
due to agglomeration benefits.
CHAPTER III. PROPOSED ECONOMIC
THEORY
Chapter III (NEW economic
theory)
Does the cause of the demand of the
consumers is more comprehensively
based on the location of the product of
the manufacturers, rather than the
value of the product per se? Does it
overcome the products that the
consumers primarily need?
How does value affect the demand of
your product?
Regardless of the kind of product that you have, customers will always base their
purchasing decisions based on the perceived value of the product or service that
you offer.
It is, therefore, critical that you know how to highlight the perceived value of
your product in the best possible way. Remember that you are just one out of
hundreds and hundreds of businesses that offer more or less the same product or
service, so an excellent perceived value will just help you stand out from your
competition.
Customers buy a product because they have a need, whether that need is
functional or more aesthetic. However, when customers think of fulfilling their
needs, they are primarily thinking of the solution and not the product itself.
Selling on customer value means thinking in the customers terms and presenting
a solution to those needs, not a product.
How does location affect the demand of
your product?
Your business's location is key to successful operations and overall growth. When
choosing your location, consider company needs, customers, employees and
equipment needed to complete the services these factors will affect your product
and how will it play in the market.
If your business draws customers to a store location, the site must be convenient
to the customer. The location must be easily accessible and provide the customer
with a feeling of safety upon their arrival and exit.
Your business's service and sales opportunities are greatly affected by your
location. Your selected location should center on your target customers and should
generate walk-in traffic.
Chapter III (New Economic
theory)
Does the cause of the demand of the
consumers is more comprehensively
based on the location of the product of
the manufacturers, rather than the
value of the product per se? Does it
overcome the products that the
consumers primarily need?
Yes, a good location can generate more
demand for your business
A good location is important to the success of a business. For small businesses,
the advantages to opening a retail store in a strategic location like a busy area
can include improved revenue and increased marketing exposure and demand.
Foot Traffic
One benefit of being in a strategic location is the availability of a significant
amount of foot traffic or customers. For example if you want to advertise pricing
specials, then one option is to put a sign in the window and grab the attention of
the people walking by. The large amount of foot traffic in a busy area offers
retailers a ready-made customer base that will decide to enter your store out of
curiosity at first, but then eventually become longtime customers.
Yes, a good location can generate more
demand for your business
Variety
A strategic location offers a wide variety of potential customers generating you
higher demand and revenues. Cross sections of many different marketing
demographics pass by your retail location every day and give you the chance to
offer a wider variety of products that can improve your profit margin. Monitor
the kinds of customers that come into your store and begin to offer products that
would sell quickly. For example, if you have a clothing store that is situated near
a school and it is frequently visited by parents with young children, then setting
up an additional small candy counter could prove to be profitable.
Yes, a good location can generate more
demand for your business
Marketing
The startup marketing plan of a retail store often includes paying for advertising
on the radio, newspapers, and on the Internet to draw attention to your location.
But when you are in a strategic area, you have the option of experimenting with
different marketing approaches that can prove to be less expensive but more
effective. For example, announce an upcoming sale only by putting signs up in
your window for the foot traffic to see. You can find many ways to utilize your
foot traffic that will save you money on marketing and still generate higher
demands for your product or business.
Application of our proposed theory in the
Philippines
Put up a Sari-Sari Store Business

If your house is placed in a very strategic location where theres a huge

traffic of people passing your house this means higher demand then you
might want to consider putting up a sari-sari store. The sales can actually go
up to P10,000 a day. Well, its because some stores is on the main road of
subdivisions and almost everybody is passing by the store.
Application of New economic theory in
the Philippines
One of the most important factors for a business to get right when considering a new location, is the actual
site. Though there are many issues to consider when youre looking for space to house your business, make sure
you ask yourself these four important questions:
Foot traffic?
Affordability?
The surrounding establishments?
Best locations are:
MRT and LRT stations
Malls (inside and outside)
Sidewalks
Schools
Supermarkets and Public Markets
Public transport terminals
Any place where foot traffic is heavy
Application of our proposed theory in
the Philippines
Location will make or break your business. Good location means higher Demand
for your product. Remember, most people dont buy from food carts because
theyre crazy about the food. They buy because theyre cheap and convenient.
Its basically an impulse purchase. If theyre not in a hurry and have cash to
spare, wholl stop them from going to a nearby Mang Inasal or Master siomai?
Remember that some factors are beyond your control. Rent can suddenly go up
for no reason. Foot traffic can vary wildly depending on the time of year. A
competitor with better offerings might suddenly pop up next to your stall and
drive down your profits. Anticipating these things in advance will help keep your
earning expectations honest.
PROPOSED ECONOMIC THEORY:
THE PRODUCT VALUE THEORY (PVT)
Relatively, the NEG theory proposes that the location of
producers (manufacturers and companies) and the consumers
(the people) plays a vital component or role, so it may seem, in
the pattern of the economical supply and demand. Moreover, the
product value theory questions whether the cause of the demand
of the consumers is more comprehensively based on the location
of the product of the manufacturers, rather than the value of the
product per se? Does location of the product being supplied
(provided that the product is a luxury) sufficiently overcome the
products that the consumers primarily need?
 Product Value lies at the core of the economic
adjustment process. If the actual price of
something were above the value, the extra
profits to be made would attract more firms
into that industry higher demand leading to a
greater supply and eventually lower prices;
conversely, if the actual price of something
were below the value, the losses or sub-
normal profits would drive firms out of that
industry lower demand leading to a smaller
supply and eventually higher prices.
Practical applications of PVT:

The value of the product, and not its geographic availability, dictates the
extremity if its demand, and therefore its production as well.
This theory can be seen through the online shopping phenomena, were
people purchase thing that they want and need, regardless of it geographic
availability.
This theory has very complex realities, leading to complex solutions.
History and expectations
CONCLUSION
The NEG theory proposes that the
location of producers
(manufacturers and companies)
and the consumers (the people)
plays a vital component or role, so
it may seem, in the pattern of the
economical supply and demand.
A good location
The large amount of foot traffic in a busy
area
A strategic location
The startup marketing plan of a retail store
END OF PRESENTATION