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aphy models and tied this discussion to endogenous growth models. This work has been pioneered by an economist named Paul Krugman. We are going to talk about his work and see how this can be related to the more general issue of the role of technology and the question of socalled knowledge industries as a new source of hope for lessdeveloped regions. Krugman’s work deals with a bination of trade theory and location theory. Standard trade theory basically ignores space as an explicit argument in trying to explain trade. A standard theory of trade essentially argues that countries parative advantage in trade depends on factor endowments. This model assumes perfect petition and constant returns to scale. Krugman basically says that neither of these assumptions is likely to be correct in today’s world, ., he argues that imperfect petition and increasing returns to scale are more likely to be true. In this world of imperfect petition and increasing returns to scale, trade will be driven by things like market size and, very importantly, external economies, of which increasing returns is an example, as is labour pool effects, specialist supplier effects, etc. What we observe in practice in such a world is a concentration or clustering of industries in certain locations and a kind of selffulfilling prophecy whereby once a region gets ahead, it stays ahead, ., growth begets more growth. Although Krugman sets forth his theory to explain international trade, he also argues that these factors of increasing returns and external economies are most likely to be found at the local or regional level. In other words, they explain the economic specialization and growth of small areas and only by extension, of whole countries. So now, a theory of international trade has been turned into a theory of regional development. One of the more important char