Income convergence within and between countries

Abstract

We study how trade changes the rate of income convergence within and between countries in a model of endogenous growth. An externality in the production of human capital implies that inequality slows down growth under autarky. Eventually incomes converge, raising the growth rate. Trade acceler- ates (slows down) growth and the rate of income convergence in the poor (rich) country. In the long run trade ensures that countries grow at the same rate and that the ratio of their incomes tends to 1. Trade pattern reversals are possible since the initially wealthy country may be overtaken by the poor country