Does international trade lead to uneven development or convergent growth?

Abstract

This study presents a model of North–South trade and development and investigates the growth rates of two countries under a trade pattern that the North specializes in investment goods while the South specializes in consumption goods. Many studies on North–South trade conclude that both countries' growth rates are equalized in the long run. Conversely, we show that if the ‘comparative advantage’ is explicitly considered, both countries' growth rates are not equalized in some cases and, hence, the South cannot catch up with the North even in the long run. Unlike many previous studies, we close the model by fixing each country's income distribution and making the price and quantity variables interdependent. Our results show that the growth rates of both countries are equalized in the long run if their trade patterns are fixed, irrespective of their comparative advantages, whereas their growth rates are not equalized in some cases if their trade patterns are determined by the comparative advantage principle.