Urban Growth Model Based on Economic Geography

Abstract

In economic activity, economic growth means increasing production of goods and services. Economic geography is economic system with respect to spatial dimension. Rapid economic development and structural changes such as rents, residential area, and transportation systems are indicators of progressivity of a country and its economics. A country is said to progress when the production rate of goods and services are increasing, then the volume of goods and services produced are also increasing from time to time. Neoclassical theory of economic growth depends on the increased the supply of factors of production and the rate of technological progress. The production factors are labor and capital. Domar in 1948 stated that production output is a function of capital. As a result, labor is always combined with capital on fixed proportion. Solow in 1956 added labour as one of the variables of production function. This study aims to examine the dynamics of urban growth model based on economic geography, i.e. study of the economic system based on the location and geographical conditions. The urban economic growth model considers the urban area to be divided into two areas, namely residential area and central business district. Urban area is assumed to have centralized workforce and multi sector economic system. The main economic activity in the central business district is production. On the other hand, consumption and saving activities are carried out in the residential area. More over people need to travel from residential area to the business district in their economic activities. This study will also examine the equilibrium solutions of the model and then give simulation on the model. The results of theoretical study show that the dynamic system of urban economic growth model is formulated in the form of linear system of first order differential equations. The variables which determine economic growth are the accumulation of capital and labor inputs. The equilibrium of these variables can be determined. Capital accumulation shows a pattern that follows an exponential function. Simulation study give the following results. The characteristics of urban economic growth are confirmed by the fact that when the elasticity of the urban industrial sector capital increases, then production output of the two sectors, both industrial and service sector, are increased. The industrial production increases sharply, while the service sector production output is relatively stagnant and then increased with a slower rate compared to the industrial sector. Increased elasticity of capital in industrial sector also tends to increase the income of urban residents, the labor wages, and the capital of both sectors. However, housing consumption tends to fall with increases in industrial sector capital elasticity. Furthermore, simulation results demonstrate the spatial and temporal changes in urban land rental values tend to decrease with increasing distance from the central business district and increasing time. Highest land rent is in a location that has the shortest distance to the central business district. The simulations also show increase in consumption following the increase in distance from the central business district. This suggests that the further away from the business district, the more people who rent or buy housing. On the other hand, housing rents tend to increase according to distance and time. It indicates that the further away from the central business district, the price of rental housing is more affordable.