Abstract
This paper studies the interaction between inequality and demand patterns for goods in a North–South trade model with credit market imperfections. The paper analyzes the effects of financial market globalization on cross-country patterns of human capital investment. In the model, credit market imperfections arise due to potential default by borrowers in the international credit market, and cause a need for borrowers to have enough wealth to invest in human capital. Under non-homothetic preferences, cross-country differences in human capital investment affect patterns of comparative advantages. When the efficiency of the international credit market is low, financial market globalization causes inequality in human capital investment across countries. When the efficiency of the international credit market is high, product cycles can occur.
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