Trade, Capital Accumulation, and Wage Differentials: A Dynamic Model of the Comparative Advantage Theory

Abstract

The decline in local economies has become more serious in recent years, and globalization has resulted in increasing regional disparities. The reason the gap has widened so much lies in the basic principle of a market economy: companies that operate in a market economy seek to maximize profits. There is no doubt that this pursuit of profit will be the engine of economic growth, but it is also true that continuing to increase profits raises various concerns. While it is true that the production structure of global companies is very efficient, social disparities will continue to grow.

In this paper, we construct an economic development model for two regions (south and north) and three sectors (agriculture, industry 1, and industry 2). We show that due to labor constraints in industrialized regions, each region specializes in the production of different goods only by increasing wages, and present a model showing the process that achieves endogenous equal development.

Initially, even if capital accumulation in the two industries is more advanced in the north than in the south, labor supply will be short in the north, and wages will rise in that region. The competitiveness of the north declines, and in industries where capital accumulation has been relatively slow in the north, the south can also develop. As a result, each region will specialize in one industry. However, this results in a wage gap between the north and south.