Globalization, Divergence and Stagnation

ends with some extensions and a list of empirical predictions. Section 3 shows some
supportive empirical evidence. Section 4 concludes.

2 The Model

2.1 Autarky

Consider Hrst the set N of rich countries (the North). The North is assumed to
be a collection of perfectly integrated economies with similar characteristics, whose
total population is L^. The subscript N is suppressed where it causes no confusion.
Consumers have identical isoelastic preferences:

ʃ ln c (t) e ^ρtdt.

There is a continuum [0,1] of sectors, indexed by i. Output of each sector, у (i), is
aggregated in bundle Y used both for consumption and investment:

where e > 1 is the elasticity of substitution between any two goods. The relative
demand obtained by maximizing (1) is:

The aggregate Y is taken as the numeraire and its price index is therefore set equal
to one:

Each good у (i) is homogeneous and produced by competitive Hrms using machines
x (i) and labor I (i):

у (i) = A (i)^β x (i)^1-β I (i)^β ,

where A (i) is an index of machine productivity in sector i. Machines are sector-
speciHc, non tradeable and depreciate fully after use. Demand for machine x (i)

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