Developed and Developing Economies: A Synthesis of First and Second Natures

Abstract

Bearing in mind that developing countries have less capital and less advanced technologies, this paper investigates the joint impact of two different kinds of first-nature forces, Ricardian comparative advantage and the Heckscher-Ohlin advantage, and the second-nature forces on economic activity and spatial income inequality. We extend a new economic geography model without a traditional sector so that the wage is endogenous in our framework. We find that, interacting with the second nature, the impact of the first nature related to technology and that related to capital endowment are unequal and nonuniform along with the integration process. Moreover, by combining these three kinds of trade causes, we generate various patterns of relationship between spatial income inequality and trade integration, providing a better explanation for the diverse empirical studies.