Heckscher-Ohlin and Agglomeration

New Economic Geography (NEG) models are difficult to confront with the data, since "on the one hand, they generally emphasise the unleashing of agglomeration forces after trade liberalisation, but on the other hand, they also accomodate multiple equilibria and non-monotonicity" (Brülhart, 1998a). In this paper, we show that once factor proportions are fully taken into account in a standard NEG model, the indeterminacy arising from multiple equilibria becomes less severe, and non-monotonicy arises as the most general implication of this literature. We further show that, although trade integration among similar countries ultimately leads to factor price equalisation, agglomeration economies imply an overshooting of relative factor prices with respect to their free trade level in the process of economic integration. Finally, we show that the joint interaction of factor proportions and agglomeration economies may help explain the simultaneous rise in production specialisation and fall in trade specialisation experienced by most European countries in the last decades.