Economic Integration with Endogenous Technological Change in Knowledge-based Services: A New Economy

This paper introduces a more sophisticated two-sector model of endogenous long-run growth without scale effects. The world economy consists of two similarly developed countries both of which are capable of producing manufacturings and services. The knowledge-based services as intermediate inputs are used most intensively in the service sector and in the ‘service’ functions of manufacturing sector. In order to highlight the implications of economic integration for long-run performance in the presence of digital markets, we conduct a sequence of comparisons of a country’s equilibrium growth path under the alternative scenarios of economic isolation and international integration. In this paper, we seek to reformulate the idea of Grossman and Helpman model to provide in further detail the nexus of increased productivity in the advanced economies through the digital marketplaces in the 1990s.