A North-South Model of Economic Growth, Technological Gap, Structural Change and Real Exchange Rate

• The RER effect is conditional on the size of the technological gap.
• Stability is conditional to the initials parameters because of complex dynamics.
• The choice of the RER matters for a country development strategy.
• Government policies can influence the trajectory of the catching up process.

The aim of this work is to present a model of economic growth, technological gap, structural change and real exchange rate in a formal and theoretical manner, explicitly incorporating the effects of North–South technology gap and the real exchange rate (RER) at a level compatible with its “industrial equilibrium” taking in account the external constraint. In the short term, an increase in the South growth rate of the demand implies that its natural growth rate must also rise, i.e., the level of industry participation and economic productivity should also increase. In the long run the effect of RER on economic growth is conditional on the size of the technological gap and the level of industry participation in South gross domestic product. This condition generates two different dynamics such as a saddle path and multiple equilibriums. To a large extent these results are achieved from the model complex dynamics.