Long-run effects of low-wage countries' growing competitiveness and exports of manufactures
Previous work on this topic brought to light the possibility of a loss in income for the high-wage countries. Our two-country multicommodity Ricardo-Mill model extends this result to the n-good case but also shows the possibility of an offsetting income benefit, accruing to the high-wage country, if the low-wage country's productivity increases go beyond what is strictly necessary to reduce to zero the production of a good previously produced by the high-wage country. Alternative setups are also explored, in which in the low-wage country, along with a modern sector, a traditional sector exists, where workers' income is at subsistence level. If the reaction of wages of the former sector to permanent shifts of workers from the traditional subsistence sector to the modern one is sufficiently small, high-wage countries, instead of losing, will gain.
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