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Pao-Li Chang and Wen-Tai Hsu

This article reviews interrelated power-law phenomena in geography and trade. Given the empirical evidence on the gravity equation in trade flows across countries and regions, its theoretical underpinnings are reviewed. The gravity equation amounts to saying that trade flows follow a power law in distance (or geographic barriers). It is concluded that in the environment with firm heterogeneity, the power law in firm size is the key condition for the gravity equation to arise. A distribution is said to follow a power law if its tail probability follows a power function in the distribution’s right tail. The second part of this article reviews the literature that provides the microfoundation for the power law in firm size and reviews how this power law (in firm size) may be related to the power laws in other distributions (in incomes, firm productivity and city size).


Many large cities are found at locations with certain geographic and historical advantages, or the first nature advantages. Yet those exogenous locational features may not be the most potent forces governing the spatial pattern and the size variation of cities. In particular, population size, spacing, and industrial composition of cities exhibit simple, persistent, and monotonic relationships that are often approximated by power laws. The extant theories of economic agglomeration explain some aspects of this regularity as a consequence of interactions between endogenous agglomeration and dispersion forces, or the second nature advantages. To obtain results about explicit spatial patterns of cities, a model needs to depart from the most popular two-region and systems-of-cities frameworks in urban and regional economics in which the variation in interregional distance is assumed away in order to secure analytical tractability of the models. This is one of the major reasons that only few formal models have been proposed in this literature. To draw implications about the spatial patterns and sizes of cities from the extant theories, the behavior of the many-region extension of the existing two-region models is discussed in depth. The mechanisms that link the spatial pattern of cities and the diversity in size as well as the diversity in industrial composition among cities are also discussed in detail, thought the relevant theories are much less available. For each aspect of the interdependence among spatial patterns, size distribution and industrial composition of cities, the concrete facts are drawn from Japanese data to guide the discussion.