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Skill distribution and income disparity in a North‐South trade model

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  • Hesham M. Abdel‐Rahman

Abstract

. What are the impacts of free trade agreement on the welfare of different types of workers in a developed country? What is the impact of free trade on a developed country's income disparity? What is the effect of free trade on the skill distribution of a developed country? The objective of this paper is to address the above questions in a two‐sector general‐equilibrium North‐South trade model in which both countries produce one final good and one high‐tech intermediate input. The final good is produced with the use of a high‐tech intermediate input and unskilled workers. Horizontally differentiated skilled workers produce the high‐tech intermediate input. Each country is populated by a continuum of unskilled workers with differential potential ability. Workers in the North and South can acquire skills by investment in training or education. Thus, skill distribution in the North and South is determined endogenously in the model through a self‐selection process. I characterize two different types of equilibria: a closed‐economy equilibrium without trade and a free trade equilibrium. Then, I investigate the impact of free trade, in the presence of training costs, on the skill distribution within each country, income disparity, and social welfare. JEL classification: D63, F10, J31 Distribution des habiletés et disparité des revenus dans un modèle de type Nord‐Sud de commerce international. Quels sont les impacts d’un accord de libre échange sur le bien‐être de divers types de travailleurs dans un pays développé? Quel est l’impact du libre échange sur la disparité des revenus dans un pays développé? Quel est l’effet du libre échange sur la distribution des habiletés d’un pays développé? L’objectif de ce mémoire est de répondre à ces questions dans le cadre d’un modèle d’équilibre général de commerce international de type Nord‐ Sud à deux secteurs dans lequel les deux pays produisent un bien final et un intrant à saveur de haute technologie. Le bien final est produit à l’aide de cet intrant et de travailleurs non spécialisés. Horizontalement, des travailleurs dotés de différentes habiletés produisent cet intrant intermédiaire. Les travailleurs dans le Nord et dans le Sud peuvent acquérir des habiletés en investissant en formation ou en éducation. La distribution des habiletés dans le Nord et dans le Sud est déterminée de manière endogène dans le modèle via un processus d’auto sélection. L’auteur définit deux types d’équilibre: un équilibre d’économie fermée sans commerce, et un équilibre de libre échange. Il examine ensuite l’impact du libre échange sur la distribution des habiletés, les disparités de revenus et le niveau de bien‐être à l’intérieur de chaque pays, quand les coûts de formation ne sont pas nuls.

Suggested Citation

  • Hesham M. Abdel‐Rahman, 2005. "Skill distribution and income disparity in a North‐South trade model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(4), pages 1298-1326, November.
  • Handle: RePEc:wly:canjec:v:38:y:2005:i:4:p:1298-1326
    DOI: 10.1111/j.0008-4085.2005.00326.x
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • F10 - International Economics - - Trade - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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