GLOBAL INCOME DIVERGENCE, TRADE AND INDUSTRIALIZATION: Stage-Three’s Growth and Investment Rates

Once the stage-three steady state is reached (or at least when 0K is close enough to unity to approximate the steady-state 0K as equal to unity), and imply:

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Importantly, this g exceeds the stage-one g only to the extent that spillovers are localized, i.e. A<1. The common real income growth rate, viz. ga/(a-l) where g is given by, is also higher than the stage-one growth rates (as long as A,<1). Observe that the south – which is completely specialized in the traditional sector – engages in no innovation, and indeed makes no investment of any kind. Nevertheless, the south experiences the same rate of growth as the north due to continual terms of trade gains: the price of T (which south exports) is time-invariant but the price of CM (which south imports) falls. Payday Loans Online

The stage-three northern investment ratio is:

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This is greater than that of the first stage even with A=1 since all investment/innovation occurs in the north (or which ever nation acquires the core).

Finally, notice that while further reduction of ф raises both nations’ real income trajectories (via one-off drops in the perfect price index), liberalization has no affect on the common slope of their growth paths.

Stage-Two: Growth and Investment During the Take-Off

During the take-off stage, the world economy is in transition between steady states. Characterizing the economies’ behaviour during such a phase is a truly difficult problem, since we must work with three nonlinear differential equations. Be that as it may, it is clear that during the course of the takeoff, the rate of investment and economic growth will rise to that of the third stage. Thus two of Rostow’s criteria are clearly met in the north: the rate of productive investment (in human, knowledge, and/or physical capital) rises, and one or more manufacturing sectors develop with a high rate of growth. The specialization induced by agglomeration also generates a rapid increase in trade. A generous reading of the model also includes some aspects of his third criteria since the “impulses to expansion in the modern sector and the potential external economy effects of the take-off acquire an on-going character”. The third phase of our model, in common with Rostowr’s, is marked by a high and stable rate of economic growth as well as by a more stable sectoral composition of output.