Quality choice and specialization in North-South trade
We analyse trade in vertically differentiated goods between a rich and a poor country. In autarky two monopolists, selling a single product, operate in two countries which differ only for their per capita income. If trade opens, the firm operating in the poor country exports to the rich, giving rise to one-way trade. Consumers of the rich country and the firm of the poor country benefit from trade. Liberalization may hurt the consumers in the poor country if their per capita income is quite low vis à vis the one of the rich country. Trade in vertically differentiated goods brings about an overall gain if countries are quite far apart in terms of standard of living. Real wages increase in both countries as a result of trade, but relatively more in the rich country. As a remedy to the trade deficit, the rich country may set an import reducing tariff that, only under certain conditions, may benefit also the firm of the poor country and increase total welfare.
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