Including traded intermediates in the I-sector requires only one significant modification. Instead of, the modified I-sector production and cost functions assume that new capital is produced directly from consumption goods (as in the Solow model) according to:
where Qc is the amount of the composite good Q from consumed and F is the marginal cost of capital. A generic condition for steady, endogenous long-run growth is that Tobin’s q must be independent of the level of capital stocks. The dual of this is that F must fall at the same rate as V falls. Given Dixit-Stiglitz pricing, V falls at the rate that К grows, so F must fall at the same rate. The implied regularity condition is that a/(l-a)-£=-l.
Notice that we have set A.= l in. This permits us to isolate the effects of including traded intermediates in the I-sector because, as Section 4 showed, agglomeration had no growth effect when A,= l. Customer Satisfaction
All L and К are now employed in producing Q, so:
where Y” is world income (equal to 2L+7tK+tt;*K*); В is as in with 0y=Y/Y” replacing 0t. Due to markup pricing Yw=2L/(l-a/o), so the international partition of income, 0Y, depends upon 0K according to:
and q* is given by a similar expression.
In steady state, ж falls at the rate that K’v grows, so the steady state V’s are given by. The steady state q is therefore.