DP4140 A Theory of North-South Trade and Globalization

Author(s): Elias Dinopoulos, Paul Segerstrom
Publication Date: December 2003
Keyword(s): economic growth, globalization, intellectual property rights, north-south trade
JEL(s): F12, F43, O31, O34
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4140

This Paper develops a dynamic general equilibrium model of North-South trade with scale-invariant growth. Northern firms devote resources to innovative R&D to discover higher quality products and Southern firms devote resources to imitative R&D to copy state-of-the-art quality Northern products. Both innovation and imitation rates are endogenously determined as well as the degree of wage inequality between Northern and Southern workers. The steady-state effects of globalization and stronger protection of intellectual property are analysed. It is shown that globalization leads to more copying of Northern products, faster technological change, and less wage inequality between Northern and Southern workers. Stronger intellectual property protection has the opposite steady-state effects and thus serves to moderate the effects of globalization.