Question

According to the Ricardian model and the Specific Factors model, cross-country trade would not wipe out cross-country inequality in income. Why?

Answer 1

The classical link between trade and income inequality is based on the Stolper-Samuelson Theorem developed in a traditional trade model (Heckscher-Ohlin) that assumed full employment. In this model, trade flows are determined by comparative advantage and the latter, in turn, depends on each country’s resources. As developing countries are typically well endowed with low-skilled labor relative to developed countries, the former were expected to start exporting low-skill labor intensive goods to the industrialized world. Relative demand for low-skill workers would increase in developing countries and decrease in industrialized countries and the theorem predicted that inequality between high-skill and low-skill workers would probably increase in industrialized countries as a consequence of trade with developing countries. Along the same lines, inequality would be expected to decline in developing countries.