North-South Trade and Wages with Complete Specialisation : Modifying the Stolper-Samuelson Relationship
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Original versionWorking Paper, NUPI nr 666. NUPI, 2004
From the Stolper-Samuelson Theorem, it is expected that North-South trade reduces the real wage of unskilled labour in the North. This paper questions the underlying assumption that trading countries are diversified, and examines theoretically the trade-wage link when the South is completely specialised. While it remains true that trade with the South negatively affects wages in the North, it is no longer the case that the poorer the trade partner is, the more harmful is trade for Northern wages. The negative wage impact is largest when the South has an intermediate capital-labour ratio, since it is then a more efficient producer. This also gives the largest aggregate welfare gains from trade in the North. The specialised South also gains from trade, and these gains are relatively larger, the more extreme is its factor composition. But even if the poorest countries gain from trade, capital accumulation may be more important for their welfare.