Economic Geography

Theories of Economic Geography

Trying to understand how and why wealth is distributed is no small task, and geographers have developed a number of different theories and hypotheses to explain overarching patterns.

Weber's Least Cost Theory

German economist Alfred Weber suggested that industries—seeking to minimize costs and maximize profits—would likely choose to locate manufacturing plants where labor and transportation would be the cheapest. This pattern is called the Least Cost Theory. The Least Cost Theory can be seen in action today with the many Western industries that have exported their manufacturing to developing nations where workers can be paid a lower salary.

Commodity Dependence and Dependency Theory

Commodity dependence is an economic situation in which a country comes to rely on the export of commodities to generate wealth. It is somewhat related to dependency theory, a system that enables or encourages commodity dependence: the flow of resources from developing countries (the periphery) to developed countries (the core). Wealthier countries can benefit from both commodity dependence and dependency theory, as they allow them to take advantage of cheaper resources.

World-systems Theory

We just mentioned the core and the periphery. Those concepts tie into world-systems theory, associated with economist Immanuel Wallerstein. The world-systems theory is a view of the world that divides nations into three economic tiers based on their trading supremacy: the core, the semi-periphery, and the periphery. Economic wealth is mostly concentrated in the core, to which most resources flow from the periphery. The semi-periphery is somewhere in between. Currently, most economists and geographers largely equate the core with the West.

Fig. 1 - The distribution of core, sem-periphery, and periphery countries in world trade as seen at the turn of the century

Rostow's Stages of Growth

In 1960, American economist Walt Whitman Rostow (not to be confused with the famous poet!) proposed five stages of economic development in an attempt to identify patterns of economic growth. They are:

1. Traditional society
2. Preconditions for take-off
3. Economic take-off
4. Drive to economic maturity
5. Age of high mass consumption

Driven by social, political, or military concerns, a nation would eventually face the impetus to transition from bartering, hunting, and gathering to sedentary agriculture, then to industrialization, then finally, to mass consumer spending.

Rostow's stages are more applicable to specifically Western approaches to economic development. Even then, the purely linear nature of the stages can be seen as unrealistic.

Economic Sectors

Rostow's stages of growth correspond roughly with our modern notions of development, as well as how we categorize economic-based labor. There are five different economic sectors, each of which revolves around a general type of economic activity. As a country becomes more economically developed, it will typically invest more and more energy and/or resources into the next sector, allowing it to generate even more relative wealth.

Once a country has further developed, it can (and sometimes must, to maintain expected profits) outsource its labor to the cheapest market with the most resources. That said, it is very rare for a country to entirely abandon an economic sector; doing so would cause it to be wholly dependent on foreign trade.

The Primary Economic Sector

The primary economic sector is all about harvesting, gathering, and collecting natural resources. This includes industries like farming, hunting, mining, and fossil fuel extraction. The primary sector is foundational for all other economic sectors—but it doesn't generate the big bucks! Therefore, countries whose economies mostly revolve around the primary economic sector are typically the least developed.

The Secondary Economic Sector

The secondary economic sector revolves around refining raw natural resources into something that can actually be used, so this sector includes manufacturing and construction. Think about it this way: a ream of printer paper has more economic value than a bucket full of wood pulp, so if you can develop the infrastructure that allows you to turn that wood pulp into paper, you can probably generate more income. Countries whose economies mostly revolve around the secondary economic sector are typically developing.

The Tertiary Economic Sector

Once an item has been manufactured, it needs to be sold. That's where retail comes in. The tertiary economic sector revolves around not just retail sales and mass consumption, but also the service industry in general, which can range from garbage collection to a taxi ride. Countries whose economies mostly revolve around the tertiary economic sector are typically considered developed.

Fig. 2 - There is often a relationship between economic sectors and the level of economic development. Developed countries are in blue; developing countries are in yellow; and least developed countries are in orange

The Quarternary and Quinary Economic Sectors

There are two more major economic sectors. The quarternary economic sector revolves around technology and research, while the quinary economic sector revolves around high-level professional decision-making. As with the tertiary economic sector, countries that can afford to invest in and develop these sectors en masse are typically developed.

World Economy

One key aspect of economic geography should be obvious by now: economic development does not happen in a bubble. Whether from competition or cooperation, economic development is often inextricably linked to a nation's relationship with other nations, be it trade, outsourcing labor, or military and economic rivalry.

Fig. 3 - The world is becoming increasingly interconnected through international trade

Scenarios like this drive the world economy, a term used to describe the collective interactions of all of the world's different national economies. The world economy is becoming increasingly interconnected, partly thanks to a widespread commitment to neoliberalism, a system of economic thought that seeks to make international trade as easy as possible. This is mostly accomplished through the promotion of free trade, wherein countries eliminate tariffs, which are taxes imposed on imports and exports.

Economic Geography Examples

To see economic geography in action, let's take a look at a couple of different examples of development concepts.

GDP and the Human Development Index

There are several different ways to determine how economically developed a country is. Perhaps the three most common indicators are gross domestic product (GDP), gross national income (GNI), and the Human Development Index (HDI).

GDP is the total monetary value of all of the economic activity within a country's borders. GDP per capita is a division of that GDP by the total number of people that live within the borders. GDP is usually measured annually. So, for example, in 2019, the United States had a GDP of $21.43 trillion; the GDP per capita was a little over $65,000 dollars. GNI is very similar to GDP, except that it measures only the economic activity of official residents and citizens, domestic and abroad. An American citizen living and working in France, for example, would not be included in the GDP but would be included in the GNI.

Typically, the higher the GDP/GNI, the more economically developed a nation is. This is not always the case, however; India, Brazil, and China all command top 10 GDPs, but are considered developing or semi-periphery nations.

To address the fact that GDP and GNI do not present a complete picture, the United Nations promulgated the Human Development Index, a way of measuring development that combines per capita income with other general quality of life indicators like education and life expectancy.

Only one country, Germany, has a top 10 HDI ranking and a top 10 GDP. This discrepancy between GDP and HDI ranking suggests that economic development on its own does not always lead to an improvement in life for the common citizen. This awareness has, in part, led to the concept of sustainable development.

Sustainable Development and Resistance to Modernization

It is often taken for granted that economic development is a good thing. And for many, if not most people, it usually is. But economic development also brings with it some negative consequences. Uneven development can leave some people impoverished even as national wealth increases. Additionally, economic development often takes a heavy toll on the environment as the natural world is exploited for resources.

Enter sustainable development, a concept that seeks to balance economic growth with respect for human rights, long-term viability, and the environment. The United Nations has even established 17 Sustainable Development Goals to help guide nations toward global sustainability. Check out our explanation on Sustainable Development for more information!

However, it should be said that not every group agrees with the basic premise of economic development. Some groups, like the Maasai of Kenya, reject the very notion of development and prefer to be left alone—more or less ignored by the world economy—to persist in traditional lifestyles, like hunting and gathering or nomadic herding. This puts them at odds with an increasingly interconnected economic landscape.