Globalization, Divergence and Stagnation

Produced in N

Produced in S

Figure 1: Free Trade Equilibrium

condition (TB), incorporating equilibrium technologies, can be rewritten as:

Note that ω is increasing in z and decreasing in θ. Further, if σ = 0 (or e = 1,
as in the Cobb-Douglas case), the equilibrium becomes independent on the sectoral
distribution of productivity and the degree of IPRs protection.

The long-run free trade equilibrium can now be found in Figure 1 as the in-
tersection of the two schedules Φ (19) and TB (22). The graph can be used to
study the effects of a strengthening of IPRs in the South. From (22), this implies
a downward shift of the TB schedules which raises the relative wage in the South
and reduces the set of goods produced there (z increases). Vice versa, a reduction
of θ leads to a deterioration of the Southern relative wage and a relocation of some
industries from the North to the South. Comparing (22) with (15), and noting that
limθ→o ω = max Φ_n (i)∕φs (ŋ, proves the following:

15

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