Human Capital Formation and International Trade
This paper develops a two-country, two-sector model of trade where the only difference between two countries is the cost of human capital formation. It is shown that this difference completely shapes the pattern of trade. Trade, in turn, affects the distribution of human capital both at extensive and intensive margins. Furthermore, cross-country differences in the costs of human capital formation determine the effects of trade on income distribution and welfare in each country. The paper also shows that lowering the cost of human capital acquisition in one country affects human capital formation, income distribution, and welfare asymmetrically in two countries.
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