This chapter focuses on the empirics of geographical economics. In the first part of the chapter we look into (i) the existence of the home market effect and (ii) a spatial wage structure. The home market effect implies that if a region displays a relatively large demand for a certain good, this increased demand will lead to a more-than-proportional increase in the region’s production of that good. The spatial wage structure implies that wages will be higher in or near economic centres. These studies, however, do not offer a wholly convincing test of geographical economics models. A real test should also look at the empirical validity of this approach when the spatial distribution of economic activity is not fixed but subject to change. This is the topic of the second part of the chapter, where we test for the impact of shocks on the spatial allocation of economic activity and for the relationship between transport costs and agglomeration. The chapter also discusses why and how modern empirical research in geographical economics has gradually become part of a broader empirical research agenda in spatial economics with a focus on micro-data and new empirical methods.

This chapter focuses on the empirics of geographical economics. In the first part of the chapter we look into (i) the existence of the home market effect and (ii) a spatial wage structure. The home market effect implies that if a region displays a relatively large demand for a certain good, this increased demand will lead to a more-than-proportional increase in the region’s production of that good. The spatial wage structure implies that wages will be higher in or near economic centres. These studies, however, do not offer a wholly convincing test of geographical economics models. A real test should also look at the empirical validity of this approach when the spatial distribution of economic activity is not fixed but subject to change. This is the topic of the second part of the chapter, where we test for the impact of shocks on the spatial allocation of economic activity and for the relationship between transport costs and agglomeration. The chapter also discusses why and how modern empirical research in geographical economics has gradually become part of a broader empirical research agenda in spatial economics with a focus on micro-data and new empirical methods.