Trade Pattern and Economic Development when Endogenous and Exogenous Comparative Advantages Coexist

Jeffrey D. Sachs, Xiaokai Yang and Dingsheng Zhang

No 03A, CID Working Papers from Center for International Development at Harvard University

Abstract: This paper applies the infra-marginal analysis, which is a combination of marginal and total cost-benefit analysis, to a model with both constant returns and increasing returns in production and with exogenous and endogenous comparative advantages. It demonstrates that as transaction conditions are 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. Two types of dual structure may occur in the transitional stage of economic development and globalization. One of them involves the division of labor in the developed economy and autarky in the less developed economy, generating increasing disparity of per capita real income between the two types of economies. The other involves a domestic dual structure in the less developed economy, where the population is divided between commercialized sector which trades with foreign country and self-sufficient sector which is not involved in trade. All gains from trade go to the developed economy. This paper shows that deterioration of a country’s terms of trade may concur with an increase of gains that this country receives from trade provided productivity progress from an expanded network of division of labor outpaces the deterioration of terms of trade. In the model with both endogenous and exogenous comparative advantages, a country may exports a good with exogenous comparative disadvantage if endogenous comparative advantage dominates this exogenous comparative disadvantage.

Keywords: Trade pattern; dual economy; endogenous comparative advantage; endogenous specialization; division of labor (search for similar items in EconPapers)
JEL-codes: F1 O1 (search for similar items in EconPapers)
Date: 1999-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Trade Pattern and Economic Development when Endogenous and Exogenous Comparative Advantage Coexist (1999)
Working Paper: Trade Pattern and Economic Development when Endogenous and Exogenous Comparative Advantages Coexist (1999)
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