Trade, development and converging growth rates: Dynamic gains from trade reconsidered

Abstract

Within an endogenous growth framework, we examine dynamic gains from trade for parametrically distinct countries. In the absence of international spillovers or factor mobility, previous endogenous growth models generally imply that trade in goods must amplify differences in (1) factor endowments, (2) rates of technical change and (3) economic growth. Even the dynamic HOS model suggests that trade intensifies differences in endogenous factor endowments. In contrast, we present a model where trade in goods alone is sufficient to reduce differences in rates of growth, technological change and factor endowments between leader and laggard economies. The key to the reduction in the gap in growth rates is that both human capital and technological change are not just endogenous, but that their respective costs of accumulation interact. Since skilled and unskilled labor is endogenous, we can also derive implications for cross-country relative wage movements.