Aggregate supply in spatial general equilibrium theory

ABSTRACT

Spatial general equilibrium (SGE) theory and macroeconomic theory have developed in isolation. This paper explores some implications of SGE theory for the aggregate supply of GDP in terms of spatial differences in total factor productivity (TFP) and amenities. We show, inter alia, that if internal labor mobility is imperfect, local productivity shocks may adversely affect GDP if they occur where TFP is low. These theoretical results raise existential questions about the interpretation of productivity shocks in macroeconomic models, and about the absence of amenity shocks in macroeconomic discourse.

KEYWORDS:

• aggregate supply
• spatial general equilibrium
• spatial productivity

JEL:

• B22
• J61
• O18
• R12

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.