Exercise 18.26. * Instead of the multi-sector model in subsection 18.4.3, suppose that output is given by an aggregate production function of the form Y (t) = h γYL (t) ε−1 ε + (1 − γ)YH (t) ε−1 ε i ε ε−1 as in Chapter 15, with YL and YH being produced exactly is in that chapter. Assume as in the model of subsection 18.4.3 that new technologies are developed in the North for the Northern market only. (1) Characterize the steady-state (balanced growth path) equilibrium of this economy. [Hint: use exactly the same analysis as in Chapter 15 and subsection 18.4.3]. (2) Show that if σ ≡ ε − (ε − 1) (1 − β) is equal to 2, the results are identical to those in subsection 18.4.3.

(3) Derive the equivalents of Proposition 18.8. (4) Do the implications of inappropriate technologies become more or less important when σ increases?