Krugman showed the uneven development in
his North-South model assuming
increasing return production
technology. However his
theory was very
exciting,
it was not based on strict microeconomic foundations. The purpose
of this paper is to re-examine this theory
assuming profit-maximizing
behavior of individuals. Capital mobility is assumed. One can
invest
his capital whatever countries or firms
where the interest rates are
higher. Thus determined short-run equilibrium is stable under a mild
assumption. At the long-run equilibrium, North and South have equal
amount of capitals. However, if capital is not mobile
across the
countries, then the uneven development
results as in Krugman's model.
We also derived the possibility of uneven
development under the
assumption of capital mobility, if the
external effect increases the
marginal productivity of each individual.