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  • College of Economics
  • Regional economics—Considering economics from the perspective of “space”
  • Professor SUDA Masaya
  • College of Economics
  • Regional economics—Considering economics from the perspective of “space”
  • Professor SUDA Masaya

Taking “space” into account to examine a more realistic economy

In economics, we attempt to explain our complex and diverse economic activities based on assumptions that simplify reality to the extent possible. One such assumption is the oft-criticized “economic man,” who always behaves solely in consideration of maximizing his/her economic benefit. The way production volumes and prices are determined in a market where sellers and buyers engage in transactions is also just an assumption. Economists, more than anyone, know that these assumptions are unrealistic, but they are challenged to explain the real-world economy by using such assumptions as much as they can. When faced with a problem that cannot be explained based on existing assumptions, economists are flexible enough to consider how the assumptions can be modified. In regional economics, my field of specialization, the element of “space” is introduced into the theory of economics. In other words, by incorporating spatial consideration into economics, we try to explain diverse problems occurring in the real-world economy and examine measures that can be taken. Let us now look at what is meant by the “spatial consideration” of economics.

 

In introductory economics textbooks, “consumers (buyers) wishing to buy apples” and “farmers (sellers) wishing to sell apples” are often used to explain examples of economic activities. In such examples, the buyers and sellers are always presumed to be located next to each other, but in reality they are usually separated by “space,” with the former being in Tokyo and the latter being in Aomori Prefecture, for example. When buying or selling apples, either the consumers need to travel to Aomori or the farmers need to ship the apples to Tokyo. Therefore, when engaging in an actual transaction, the transportation cost of either the apples or the consumers must be taken into account. Even if large quantities of apples were produced in Aomori, consumers would not be able to purchase the fruit in Tokyo if transportation costs were excessively high. (Imagine a situation where no railway or expressway were available.)

 

Let’s explore this from another viewpoint. Besides Aomori, apples are also produced in Nagano, Yamagata, and Fukushima prefectures. I presume you have all learned in social studies that “apples grow best in a cool climate, and are therefore mostly grown in Aomori and other locations with a cool climate.” However, this only explains half of the truth. When considering the fact that Tokyo has the highest demand for apples due to its large number of buyers, it may be more convenient to produce the fruit in Tokyo to save on transportation cost. Why is it then that we rarely see Tokyo-produced apples in stores? The reason is that the cost of producing apples in Tokyo against all odds (the fact that the produced apples are not tasty is also a kind of cost) is, in fact, higher than the transportation cost of bringing the harvested fruit from Aomori. The quantitative relationship between production cost and transportation cost is by no means permanent. The relationship may well be reversed if transportation cost increases or an improvement is made to apple varieties. It should also be noted that, although Nagano is far closer to Tokyo than Aomori (meaning the transportation cost incurred is lower), there are many more apples from Aomori than from Nagano in stores in Tokyo. This is probably because the advantages of selling Aomori-produced apples (e.g., quality, low production cost) are great enough to offset the higher transportation cost. Now you may be starting to realize why various products are produced at particular locations.

 

The logic behind why a particular industry is located in a particular site also applies to other sectors including the industrial and service sectors. And reversals in the quantitative relationship between production cost and transportation cost are more likely to occur in these sectors, resulting in the fall of an industry in one location and the rise of another at a different location.

 

Such are the issues we deal with in regional economics. When I tell people that I specialize in regional economics, I am often asked, “Which region do you specialize in?” but regional economics is not about focusing on any particular region. Regional economics tries to establish and verify theories that apply to any region in the world, whether Tokyo, New York, or Shanghai. People commonly use the term “region” to refer to “rural areas,” but the “region” studied in regional economics simply denotes “space” in the universal sense. The basic approach taken in regional economics is to apply economic theories to examine a wide range of issues arising from a consideration of the element of space, the locations of economic activities, inter-regional trade, and economic agglomeration.

Considering why a large volume of milk is produced in the Tokyo metropolitan area by using the logic of regional economics

The moment you wonder where various economic activities take place, or should take place, you have entered the realm of regional economics. Let’s take a look at a few concrete examples.

 

When you think of milk production, you may immediately think of Hokkaido. Statistically, Hokkaido is indeed ranked No. 1 in Japan in milk production volume, with other prefectures lagging far behind. (Hokkaido produces 10 times as much milk as the No. 2 prefecture.) Meanwhile, the prefectures ranked highest after Hokkaido are Tochigi, Gunma, and Chiba, all of which are neighboring prefectures of Tokyo. This is because there are advantages in producing milk near Tokyo, a mass consumption area. When considering the cost of land alone, Hokkaido may seem like a better choice, but a high transportation cost is incurred to bring milk all the way down to Tokyo. Meanwhile, milk can be shipped from Tokyo’s neighboring prefectures to Tokyo at a much lower transportation cost, so there is a trade-off between the cost of land and transportation cost. The trade-off relationship is shown in the bid-rent curve (Figure 1). Although the cost of transportation is determined by the distance between the production site and the market (in this case, Tokyo), the revenues generated by milk farmers are the same wherever they are located (or so it is assumed). The revenue less the transportation cost is the cost of land (which is why the cost of land is lower in Hokkaido), which results in the bid-rent curve in Figure 1. The gradient of the bid-rent curve differs by produce depending on the freight rate. (The curve in Figure 1 is based on examples of milk and wheat.) Supposing farmers rent land from landowners, the landowners would likely rent out land to farmers who are willing to pay more for their land. Milk, whose freight rates are higher, is consequently produced at locations close to Tokyo, as depicted to the left of point X in Figure 1.

 

[Figure 1]

 

 

In spite of this logic, you may frequently see Hokkaido-produced milk at supermarkets. In reality, this may be because milk can be produced at a lower cost in Hokkaido, or the gap in transportation costs may have shrunk due to the development of transportation technology. Or, it may be because some consumers are eager to select Hokkaido-produced milk despite its slightly high prices because they are lured by the region’s well-established status in milk production. When considering such factors, it can be explained why some milk sold in Tokyo is produced in Hokkaido. (Instead of going into details, I will leave you to think about it for yourselves.) However, even if milk manufacturers use Hokkaido-produced milk, it is highly likely that they conduct the packaging process near Tokyo. This is because it is much easier and less costly to bring massive quantities of milk in large tanks from Hokkaido and package it into individual containers near Tokyo than to transport containers packaged in Hokkaido, even when taking into account the expenses incurred to build a packaging plant near Tokyo.

 

Why do you think the production volume of milk is greater in Hokkaido than in other prefectures? The answer is that milk produced in Hokkaido is not only for drinking, but also for  producing cheese, butter, and other dairy products. Incidentally, such dairy products are largely produced in Hokkaido. This is because the weight of butter or cheese made with one ton of milk is much lighter than one ton, which means the cost of transporting such dairy products is much cheaper than transporting milk. Thus, the gap in transportation costs very well explains why drinking milk is packaged near Tokyo but butter and cheese are produced in Hokkaido before they are transported to Tokyo.

Why call centers of large corporations are located in regional areas

The location of call centers provides us with another example. In recent years, many companies set up their call centers in regional areas. I once received a return call from a call center of a life insurance company, which, to my surprise, was located in Nagasaki Prefecture, judging from the area code displayed on my mobile phone. The reason why the company runs a call center in Nagasaki and not in Tokyo is because both personnel expenses and office rental cost are far lower in Nagasaki. Most call centers set a toll-free number to bear the call charges. Considering the population, the Tokyo metropolitan area has the highest number of callers, so money could be saved on call charges if call centers were located in Tokyo instead of Nagasaki. However, due to the recent reduction in call charges (i.e., the transportation cost of information), it has become feasible to operate a call center in Nagasaki.

 

In the English-speaking world, the locations of call centers span the globe. For example, some call centers for American consumers are in the Philippines or India. This is not just because the wage levels are lower in these countries, but also because international time differences can be taken advantage of to operate call centers around the clock. For example, during midnight hours in the U.S., call centers in these countries can handle calls during the daytime, which means that no midnight work allowances need to be paid to call operators. Usually, calls are directed to different call centers around the world depending on what time they are made.

Is agglomeration in cities bad?

Lastly, from the perspective of regional economics, I would like to comment on Japan’s progressive agglomeration of functions and population in the Tokyo metropolitan area. The government’s administrative functions, the headquarter functions of corporate entities, mass media operations, and universities, among others, are highly concentrated in Tokyo, which is attracting a huge influx of population into the metropolitan area. Conversely, an outflux of population from regional areas is causing departments stores in their downtown areas to close down and railway and bus routes to be abolished in some of the scarcely populated localities. These situations have caused widespread criticism over the concentration of population and functions in Tokyo, denouncing it as making Tokyo prosper at the expense of regional areas. Lately, there has even been talk saying that if population continues to concentrate in Tokyo, many local municipalities will eventually disappear.

 

The outflux of population from regional areas is obviously exerting some negative impact, and the influx of population into Tokyo, the receiving end of the population, is giving rise to various problems including the congested commuter trains and shortage of childcare facilities, but let us now turn our eyes to the benefits brought about by the agglomeration in Tokyo.

 

The appeal of large cities such as Tokyo lies in their diversity. For example, a clothes shop in a rural region may only carry common plain white T-shirts, but modern shops in Harajuku offer T-shirts featuring a variety of designs and colors. While a white T-shirt can be purchased for 1,000 yen, T-shirts sold in Harajuku may cost around 1,500 yen, but as long as you can find a T-shirt that perfectly fits your taste, you will likely be willing to pay the extra 500 yen. From the viewpoint of shops in Harajuku, this means that T-shirts sell at a price 500 yen higher if the design is attractive. This notion has encouraged even more shops to advance into Tokyo. A high concentration of shops leads to a wider variety of T-shirts sold in Tokyo, which, in turn, attracts consumers who are looking for something more than mediocre designs.

 

The important point here is that diverse T-shirts priced at 1,500 yen are rarely available at rural clothes shops, as such shops have no choice but to offer commonplace T-shirts passable for all tastes, given the small demand they can tap into. In other words, you will never be able to obtain a T-shirt that perfectly fits your taste if you are in a provincial area. This theory applies to a variety of products beyond T-shirts, as well as places to work. For example, someone proficient in Arabic will have hardly any chance of finding a job that suits his/her ability in any regional part of Japan, but once in Tokyo, it is relatively easy to find a workplace where his/her language proficiency is demanded, such as trading companies engaged in business with Middle Eastern countries.

 

 

[Figure 2]

 

Figure 2 depicts the causal relationship of spatial agglomeration. Concentration of people in Tokyo leads to the agglomeration of corporate entities to fulfill their demand, which, in turn, increases the quantities of goods and services supplied and diversifies employment opportunities. This enhances people’s level of satisfaction, which results in attracting even more people to Tokyo. This is how agglomeration occurs in Tokyo.

 

Thus, Tokyo offers a huge selection of varied goods and services that meet the tastes of all kinds of people, as well as workplaces that make full use of diverse talent. This would be impossible if it were not for the high agglomeration. You may think T-shirts can be purchased online today, but that is because a large number of corporations have been established in Tokyo. It is doubtful whether businesses would consider selling T-shirts in a place where no other corporations exist, even if the Internet was already available. The whole point of the matter is that it is precisely because of the agglomeration in Tokyo that consumers residing outside Tokyo can buy T-shirts from a diverse selection, including those offered online. Before we know it, Tokyo has become a place that churns out new things every day that appeal to people across Japan and the world, and this all began with the agglomeration in Tokyo. From another perspective, I should also point out that the raw materials and parts for producing the diverse products offered in Tokyo are supplied from regions outside Tokyo. These regions must certainly be enjoying the positive economic effects of the agglomeration, even if they are modest, including the generation of jobs.

 

The very existence of Tokyo, one of the largest cities in the world, in Japan is bringing benefits not only to the citizens of Tokyo, but also across Japan. In other words, it is not necessarily viable to claim that the agglomeration in Tokyo is putting regional areas at a disadvantage. A variety of services generated in Tokyo are only available because of the intense agglomeration, and such high agglomeration provides businesses with advantages in many cases. In the face of competition from neighboring Asian countries, it is no small benefit for Japan to have Tokyo as its major hub, which also enhances Japan’s presence in the world.

Agglomeration of corporate entities in Tokyo

Study this theme at Aoyama Gakuin University

College of Economics

  • College of Economics
  • Professor SUDA Masaya
  • Affiliation : College of Economics, Aoyama Gakuin University
  • College of Economics
  • Professor SUDA Masaya
  • Affiliation : College of Economics, Aoyama Gakuin University

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