How does macroeconomics change as state size of a country varies?

Question

In my home country India, the states are sometimes of the size of countries. For example, Utter Pradesh, one of the larger states, is of population 200 million. For comparsion, a country like Germany has only 80 million population.

Now, the thing is that throughout the states the various indices of Human development vary, yet they all use the same currency. So, how is the state-wise macroeconomics effected when a lot of large places with varying development and economic indices come together?

I can give an example of the phenomena I have in mind. If the country is big enough, then the developed states have access to cheap labor since the people will migrate into the developed states for better life.

Answer 1

I try a partial answer.

I write from Italy, where a similar problem, not of so large scale as in India, of course, is important. The economic system of Italy is spatially non homogeneous, because regions present very large differences in economic development, economic institutions, industrial structure, infrastructures, labour market, unemployment, and so on. In particular, there is the old and unresolved problem of the so-called ‘duality’ of Italian economic system, that is a marked difference of economic development between the north and the south of the country, where the southern regions are less developed.

With regard to these problems, there is a whole branch of economics devoted to this subject, that is regional economics. I guess, as in India the question is certainly bigger than in Italy, that there must be Indian economists who have studied this matter. What can I do, to give you an idea, is to report here, translated from Italian, a short quotation from the introduction to a course of regional economics at an Italian university:

The dimension of space and territory in economic analysis

In neoclassic economic theory the dimensions of space and time are nearly ignored. Implicitly, the neoclassical model hypothesizes a world which consists of a plane space, homogeneous, where transportations costs are zero and there aren’t economies of scale. Economics activity, in such a world, in equilibrium should be uniformly distributed over the territory. It should be, at the limit, a world of small self-sufficient villages (Krugman, 1997, p. 35-36.). On the contrary, in the real world, productive resources are distributed unevenly over the space and we observe a very uneven distribution of productive activities, of population and economic wealth.[…]

There are essentially three disciplines which try to explain the interaction between space/territory and the economic system: geographical economics, development economics and regional economics.[…] Maybe, on the whole, is regional economics that gives a synthesis and a systematization of spatial problems of economic organization and development useful for the study of economic planning of the territory. […]

Regional economics requires to abandon many hypotheses of the standard model:

• Non linearity of economic processes.
• Presence of transaction costs.
• Embeddedness of economic activity in the ‘institutional ‘milieu’.
• Imperfect markets. Non constant returns.

To regional economics belong two groups of theories:

1. The theory of localization, born at the beginning of the XIX° century, which deals with the economic mechanism underlying economic activity in the space.
2. Regional growth and development theory, which focuses on spatial aspects of economic growth and the distribution of income over the territory.

The former has mainly microeconomic and static foundations, the latter macroeconomic and dynamic foundations.

[…]

Below a list of possible references given for this course: