Abstract
The authors develop an intertemporal, two-period, two-sector, specific factor model, characterized by generalized wage differentials, and show that a number of pathological results in the domestic distortions literature are all but eliminated. In this model, in contrast to the standard two-sector model, savings and investment are endogeneously determined, and trade is not always balanced. They also obtain results pertaining to the implications of wage differentials for the pattern and volume of investment, and the balance-of-trade in the current account.
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