New economic geography theory predicts a catastrophic agglomeration of economic activities in the sense that income inequality among countries or regions is inevitable. However, such a result relies heavily on the assumptions that economic activities are independent of each other. In this paper, a two-country three-sector model is developed, encompassing new economic geography theory and endogenous growth theory. Unlike the previous economic geography literature, we construct a model in which the three sectors are interdependent. Several interesting results are obtained from small changes in the model setting. (The rest is omitted.)

Executive Summary

I. Introduction

II. A dynamic geography model

III. Intermediate Analysis

IV. Centripetal and Centrifugal Forces
1. Growth rate in the steady state
2. Growth effect and specialization
3. Income inequality

V. Stability Analysis

VI. Growth and Income in the Steady States

VII. Economic Integration

VIII. Concluding Remarks

References

Appendix