A Calibrated Trade Model of Agglomeration

This paper explores just how good the idea of international agglomeration of industry can be at explaining observed economic differences between countries. An international trade model with industrial agglomeration is outlined and calibrated to real data from the world's 10 largest countries by population, in order to assess how well it can explain the gap between rich and poor countries, observed trade volumes, price differences, and other types of data. The model is revealing in showing that, given the existing location of labor, an asymmetric exogenous distribution of firms is enough to generate income disparity and other stylized facts.