Location theory: Trade Theory
There is considerable overlap between location theory and trade theory. Krugman (1993) compares and contrasts location theory and trade theory. Differences aside, the theories are ultimately quite similar in the questions they address and the assumptions theymake.Neither trade theory nor location theory is inherently international. Optimal production locations could be within one country, such as Iowa and New York City in the example already given.
Neither location theory nor trade theory identifies the specific countries or regions in which production of particular goods will be located. Trade theory speaks to characteristics of production locations, such as relative endowments of factors of production required to produce particular goods, or comparative advantage in producing one good relative to another. Location theory speaks to the optimal location of production given the cost of factors of production and transportation costs to consumers. In order to determine specificallywhich countries or regionswill specialize inproducingwhich goods, researchers have tested these theories using data on the production characteristics of particular goods, the factor endowments of countries, and transportation costs. In Sources of International Comparative Advantage, Leamer (1984) tests the precise relationships specified in neoclassical trade theory and predicts the specific countries in which production for export should be located. The evidence is, at best, an imperfect fit with the predictions of both location theory and neoclassical trade theory.