Conditional Beta-Convergence by Gravity

Abstract

Globalization and the international interdependence of states have reached their climax at the beginning of the 21st century. At the same time, growing inequalities between and within countries are leaving some behind. While a variety of models have sufficiently explained national divergence, interna tional divergence still remains subject of numerous studies. This work contributes to the set of possible explanations for worldwide disparities by combining the ideas of classical growth theory with the gravity model of trade. The circular relations between GDP, trade flows and TFP then explain long term differences in the development of states. Resulting path dependencies thus can be explained by an International Innovation Spiral that continuously leads developed economies towards potential higher outputs while existing alongside national peculiarities. In this way, the importance of trade unions and the openness to international markets can be theoretically further substantiated.