The Quantitative Relation between National Levels of Urbanization and Economic Growth

Abstract

The association between levels of urbanization and per capita incomes is one of the best known and most robust empirical regularities characterizing national economic growth. Many studies have analyzed available data towards establishing causal patterns, relating economic growth to urbanization and distinguishing dynamical regimes associated with contextual factors such as policy, institutions or culture. However, the derivation of the origins of the observed correlations in mathematical terms has apparently not yet been accomplished. Here, we show how it arises from the properties of cities, including endogenous urban growth and selection effects, whereby a growing fraction of a nation’s population lives in larger urban areas, which manifest higher per capita income due to agglomeration effects. The resulting mathematical formulation allows for an exact decomposition of economic growth across scales - from individuals and households to firms, cities and nations - showing how aggregated processes result from population averaged growth and structural changes.

Keywords: Economic Growth, Price Equation, Choice, Levels of Selection, Institutions