In the context of our model, a decrease in the cost of communications and more generally an increase in the speed of international diffusion of ideas is translated into an increase in A, which measures the internationalization of knowledge spillovers in the I-sector. To focus sharply on this trend in the relative cost of trading goods and ideas, we make the simplifying assumption that all recent integration consist of rising A. That is, we start from the stage-three situation of full agglomeration in the north and suppose that trade free-ness ф has risen to some natural upper bound, but in a fourth stage X rises towards unity, i.e. perfect international transmission of learning externalities. Stock Market
Starting from a situation with full industrial agglomeration in the north (0K=1), the increase in X initially has no impact on southern industry or on the global growth rate given by. However, southern I-sector labour productivity rises with A,, so at some threshold level of A (call this Amu for ‘miracle’), the steady-state q* exceeds unity. Beyond this, southern M firms find it profitable to invest in new ideas/varieties. The A that sets q*=l for a given ф defines the critical level of A beyond which the core-periphery outcome is no longer stable. Using this level is:
Clearly Amir rises with the free-ness of trade.
As in the case of falling trade barriers, there is a second critical value of A, w’here the symmetric equilibrium becomes stable. This value, denoted as Am,r’ is the level of A where 5q/50K evaluated at 0K=l/2, i.e., becomes negative. is quadratic in A and the economically relevant solution defines Amir’.