Macroeconomics Meets regional science: How national economic activity is Related to regional economic activity

Macroeconomics and regional science have developed as separate disciplines. However, the fact that the gross domestic product is the sum of gross regional products suggests that the two disciplines are related. The present study considers the implications of regional science and economic geography for macroeconomics. Specifically, a spatial econometric model for Israel is simulated to explore the implications of regional productivity and amenity shocks for gross regional products and the gross domestic product. We show that the effects of productivity shocks on the gross domestic product depend on where they occur and may even be negative. These results question estimates of the effect of productivity shocks in macroeconomic models in terms of spatial aggregation bias. They also provide empirical evidence rejecting the spatial granularity hypothesis regarding the secular relation between macroeconomic economic activity and regional economic activity. The study concludes with speculations about the implications of macroeconomics for regional science.