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How product innovation in the North may immiserize the South

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  • Demmou, Lilas

Abstract

The paper proposes a theoretical model investigating the welfare consequences of technological shocks in a Ricardian framework (a la Dornbush, Fisher and Samuelson, 1977). Contrary to the existing literature, the model incorporates a nonhomothetic demand function whose price and income elasticities are endogenously determined by technology. Nonhomothetic preferences are modeled as the result of the hierarchical consumption of luxury and necessity goods. The nature of technical progress determines the consumption pattern and notably the magnitude of the substitution effect between necessities and luxuries. The model is applied to the case of trade between two economies with different development levels. It is shown in particular that the developing country can suffer a fall in utility as a result of technical progress in the developed country biased towards luxury goods. This configuration depends on the size of the development gap and reflects the fact that Southern goods are less attractive, the higher the range of goods consumed. This result suggests that there is an optimal level of development gap to avoid LDCs being harmed by technical progress in the North.

Suggested Citation

  • Demmou, Lilas, 2012. "How product innovation in the North may immiserize the South," Journal of Development Economics, Elsevier, vol. 97(2), pages 293-304.
  • Handle: RePEc:eee:deveco:v:97:y:2012:i:2:p:293-304
    DOI: 10.1016/j.jdeveco.2011.03.002
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    Citations

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    Cited by:

    1. Lilas Demmou, 2010. "Le recul de l’emploi industriel en France entre 1980 et 2007. Ampleur et principaux déterminants : un état des lieux," Économie et Statistique, Programme National Persée, vol. 438(1), pages 273-296.
    2. Dutta, Meghna & Kar, Saibal & Marjit, Sugata, 2013. "Product variety, finite changes and wage inequality," Economic Modelling, Elsevier, vol. 35(C), pages 610-613.

    More about this item

    Keywords

    Dornbush–Fisher–Samuelson Ricardian model; Technology and trade; North–south trade; Nonhomothetic preferences; Hierarchic needs; Hierarchic purchases;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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