Abstract
In this paper we use a four‐sector, two‐region model to investigate the impact of an increase in capital on regional income inequality. We also analyze its impact on wages, and rents on capital and land. These changes occur due to a movement in the internal terms of trade – a worsening of the relative price of rural non‐traded goods to urban non‐traded goods – as distinct from the international terms of trade. We demonstrate that under certain conditions, an increase in urban capital necessarily immiserizes the rural region and thereby increases inequality among regions.
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