Growth and Trade: The North Can Lose

Abstract

Several models on growth and trade conclude that a country grows more when trading with a less developed country. This paper shows that this conclusion depends crucially on the assumptions of homothetic preferences and/or having just two goods with respect to learning-by-doing. The paper presents a model where the more advanced country (North) can be worse off after trading with a less developed country (South) because the demand pattern of the South is biased towards Northern products with less learning-by-doing potential. Trade can worsen the welfare if the South is large with respect to the North and/or the preference for low technology goods is high; a necessary condition is the presence of nonhomotheticity of preferences and that the North exports at least two types of goods. In this context, the paper studies the welfare of North and South, separating the static from the dynamic gains from trade.

Keywords: non-homothetic demand learning-by-doing

JEL Classification: O41, F15