Trade, Product Cycles and Inequality Within and Between Countries

This paper incorporates Northern product innovation and product-cycle-driven technology transfer into the continuum-of-goods Heckscher-Ohlin model. The creation of very skill-intensive goods induces the North to transfer production of older, less skill-intensive goods to the South. These relocated goods must be the most skill intensive by Southern standards. Thus, product cycles raise the relative demand for skilled workers and thus wage inequality within both regions. This runs contrary to the Stolper-Samuelson theorem, but accords well with the fact that wage inequality has risen in both Northern and Southern countries. Moreover, product cycles increase income inequality between countries. Although technology transfer narrows the NorthSouth income gap, this effect is more than offset by the effect of product innovation. This paper also examines welfare implications of product cycles. Product cycles benefit both the North and the South and make skilled workers in both regions better off. Further, an increase in the supply of Southern skilled labor can raise the rate of technology transfer and narrow the North-South income gap. (JEL classification: F1,