Finally, we study the expansion of trade during the three phases. The global trade volume from is graphed in Figure 7 (using the same parameters as in the previous figure writh a=0.3). Again there are three distinct phases. In the initial phase, the level of trade is fairly low and all trade is intraindustry trade. Furthermore, lowering trade costs promotes trade in a smooth, gradual fashion. Once ф>фса‘, agglomeration occurs rapidly in the north, so the nature of trade shifts. The north becomes a net exporter of industrial goods and a net importer of traditional goods. Once all industry is in the north, the value of trade is maximized since the south must satisfy all its demand for industrial goods via imports.
While the radical income disparity between poor and rich countries is still a dominant feature of the global economy, the decades since WWII have also seen some spectacular examples of rapid convergence – what Lucas calls ‘miracles’. Here we show that our model can produce a ‘miracle’ in the south (with a two region model a miracle in the south produces full income convergence). The key is to take a broader view of international integration.
Up to this point, we have viewed integration as nothing more than the lowering of trade costs. Yet much of the post-war integration, especially that of the past two or three decades, has lowered the cost of ‘transporting’ ideas more than it has lowered the cost of transporting goods. Due to unprecedented improvement in international communications, the relative cost of virtually all forms of communications – everything from the price of air travel to telephone calls – has fallen substantially in recent years. This trend is strengthened by the development of new communication technologies such as faxes, videoconferencing, overnight courier services, e-mail, etc. Emotional Intelligence