Economic Development, International Trade, and Income Distribution

Xiaokai Yang and Dingsheng Zhang

Journal of Economics, 2003, vol. 78, issue 2, 163-190

Abstract: This paper applies the inframarginal analysis, which is a combination of marginal and total cost-benefit analysis, to investigate the relationship between division of labor, the extent of the market, productivity and inequality of income distribution. The model with transaction costs and exogenous and endogenous comparative advantages shows that as trading efficiency is improved the general equilibrium discontinuously jumps from autarky to partial division of labor with a dual structure, then to the complete division of labor where dual structure disappears. In this process different groups of individuals with different trading efficiency become involved in a certain level of division of labor at different stages of development. As the leading group becomes involved in a higher level of division of labor leaving others behind, a dual structure emerges and inequality increases. As latecomers catch up dual structure disappears and inequality declines. When the leader goes to an even higher level of specialization, dual structure occurs and inequality increases again. Inequality decreases again as the latecomers catch up. Hence, the equilibrium degree of inequality fluctuates in this development process. The relationship between inequality and productivity is neither monotonically positive nor monotonically negative. It might not be an inverted U-curve. The key driving force of economic development and trade is improvement in trading efficiency.

Keywords: Keywords: income distribution; division of labor; dual structure; economic development; JEL Classification: D30; F10; O10. (search for similar items in EconPapers)
Date: 2003
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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Chapter: ECONOMIC DEVELOPMENT, INTERNATIONAL TRADE, AND INCOME DISTRIBUTION (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:78:y:2003:i:2:d:10.1007_s00712-002-0560-y

DOI: 10.1007/s00712-002-0560-y

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