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North-South Trade and Uneven Development in a Classical Conventional Wage Share Growth Model

Sasaki, Hiroaki (2018): North-South Trade and Uneven Development in a Classical Conventional Wage Share Growth Model.

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Abstract

This study presents a model of North-South trade and uneven development, and investigates the growth rates of both countries under the trade pattern such that the North specializes in investment goods while the South specializes in consumption goods. In contrast to existing studies, we close the model by fixing each countries' income distribution, specifically, the ratio of labor share to capital share. Using the model, we conduct the following two analyses. First, assuming that both countries already engage in international trade and that the North specializes in investment goods while the South specializes in consumption goods, we investigate the dynamics of both countries' growth rates and the terms of trade. Second, we investigate the condition under which such a trade pattern holds, and compare equilibrium variables under autarky and equilibrium values under free trade. From the first analysis, it follows that both countries grow at the same rate in the long run. From the second analysis, however, it follows that in the first place, the terms of trade must lie within the interval between the relative prices of both countries and that both countries' growth rates may not equalize as long as both countries engage in trade.

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