This paper develops a two-region, two-sector general equilibrium model of economic geography, where the manufacturing sector is characterised by constant returns to scale at a firm level and by increasing returns at an industry level.
The simultaneous presence of low transportation costs, a large share of manufacturing in expenditure, a high value of external economies and a low regional size in one of the two regions gives raise to a pattern of location in which one region becomes the manufacturing core and the other the agricultural periphery.
Thus, with external economies of scale, regional divergence depends in a crucial way by the presence of a large population in the region of defection