Abstract
A model of trade in intermediate and final goods is developed incorporating the features of increasing returns and monopolistic competition. It is shown that the endowment basis (comparative advantage) for trade becomes crucial in determining trade across stages of production, with the capital‐rich country a net exporter of specialized intermediate inputs and an importer of the final good. The capital‐rich country is shown to be immune to distributional conflicts, whereas for the labour‐rich country the distributional conflict crucially hinges upon the elasticity of substitution between intermediate inputs. Thus, free trade has inherently asymmetric effects on the functional distribution of income for countries differing in labour–capital ratios.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.