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International Trade and Income Distribution

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Author Info
Xiaokai Yang
Dingsheng Zhang

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Abstract

This paper applies the inframarginal analysis, which is a combination of marginal and total cost-benefit analysis, to investigate the relationship between division of labor, the extent of the market, productivity, and inequality of income distribution. The model with transaction costs and exogenous and endogenous comparative advantages shows that as transaction conditions are improved, the general equilibrium discontinuously jumps from autarky to partial division of labor with a dual structure, then to the complete division of labor where dual structure disappears. In this process different groups of individuals with different transaction conditions get involved in a certain level of division of labor at different stages of development. As the leading group gets involved in a higher level of division of level, leaving others behind dual structure emerges and inequality increases. As latecomers catch up dual structure disappears and inequality declines. When the leader goes to an even higher level of specialization, dual structure occurs and inequality increases again. Inequality decreases again as the latecomers catch up. Hence, the equilibrium degree of inequality fluctuates in this development process. The relationship between inequality and productivity is neither monotonically positive nor monotonically negative. It might not be of inverted U-curve. The key driving force of economic development and trade is improvement in transaction conditions.

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Paper provided by Center for International Development at Harvard University in its series CID Working Papers with number 18.

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Date of creation: Jun 1999
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Handle: RePEc:wop:cidhav:18

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Postal: Center for International Development at Harvard University (CID). 79 John F. Kennedy Street, Cambridge, MA 02138.
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Web page: http://www.cid.harvard.edu/cidwp/
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Related research
Keywords: Income distribution division of labor dual structure economic development

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Find related papers by JEL classification:
D30 - Microeconomics - - Distribution - - - General
F10 - International Economics - - Trade - - - General
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General

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  1. Gary Burtless, 1995. "International Trade and the Rise in Earnings Inequality," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 800-816, June. [Downloadable!] (restricted)
  2. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics. [Downloadable!]
    Other versions:
  3. Frye, Timothy & Shleifer, Andrei, 1997. "The Invisible Hand and the Grabbing Hand," American Economic Review, American Economic Association, vol. 87(2), pages 354-58, May. [Downloadable!] (restricted)
    Other versions:
  4. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May. [Downloadable!] (restricted)
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  5. Din, Musleh-ud, 1996. "International Capital Mobility and Development Policy in a Dual Economy," Review of International Economics, Blackwell Publishing, vol. 4(2), pages 185-201, June.
  6. Dixit, Avinash, 1987. "Trade and insurance with moral hazard," Journal of International Economics, Elsevier, vol. 23(3-4), pages 201-220, November. [Downloadable!] (restricted)
  7. Baldwin, Richard E. & Venables, Anthony J., 1995. "Regional economic integration," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 31, pages 1597-1644 Elsevier. [Downloadable!] (restricted)
  8. Easton, Stephen T & Walker, Michael A, 1997. "Income, Growth, and Economic Freedom," American Economic Review, American Economic Association, vol. 87(2), pages 328-32, May. [Downloadable!] (restricted)
  9. Dixit, Avinash K, 1989. "Trade and Insurance with Adverse Selection," Review of Economic Studies, Blackwell Publishing, vol. 56(2), pages 235-47, April. [Downloadable!] (restricted)
  10. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April. [Downloadable!] (restricted)
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  11. Balassa, Bela, 1986. "The employment effects of trade in manufactured products between developed and developing countries," Journal of Policy Modeling, Elsevier, vol. 8(3), pages 371-390. [Downloadable!] (restricted)
  12. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," World Bank Economic Review, Oxford University Press, vol. 10(3), pages 565-91, September.
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