Abstract
This paper presents a simple model of monopolistic competition in a North-South world. The North introduces new goods that the South takes over when the goods become old. The new goods are more technology-intensive than the old goods because innovation requires more efforts than imitation. In the literature, the world distribution of income favors the country that produces a greater range of variety. However, in this model, the South’s catching up in terms of the range of variety is not a threat to the North’s status quo. It is the difference in technology intensity that determines their relative wage.
Highlights
It is well documented that technological change reshapes the pattern of trade and the distribution of world income
This paper presents a simple model of monopolistic competition in a North-South world
The world distribution of income favors the country that produces a greater range of variety. In this model, the South’s catching up in terms of the range of variety is not a threat to the North’s status quo. It is the difference in technology intensity that determines their relative wage
Summary
It is well documented that technological change reshapes the pattern of trade and the distribution of world income. An increase in efficiency in the production of a given range of products makes a country better off by giving it a larger share of world income and consumption.1 Another thread of the literature is the product cycle model, where development of technology leads to new products rather than to an improvement in efficiency. I incorporate Romer’s [5] model to endogenize the innovation and imitation In this model, the capability of the less developed country to take over a greater range of variety is not a threat to the status quo. It is the difference in technology intensity that determines the relative wage
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