Sergey Kichko 1, Philip Ushchev 1
  • 1 National Research University Higher School of Economics, 16 Soyuza Pechatnikov Str., Saint Petersburg, 190008, Russian Federation

The Consequences of Opening Trade between Developed and Developing Countries

2017. Vol. 21. No. 1. P. 9–31 [issue contents]
We study the consequences of opening trade between developed and developing countries. To this end, we develop a two-factor general equilibrium model of international trade with variable markups and two countries which differ in relative factor endowments. We show that the more developed country (a country with a higher relative capital endowment) is characterized by higher wages and lower capital price while total individual income is higher in this country than in the less developed one. Deeper asymmetries in relative factor endowment between countries lead to more intensive trade. We also show that opening trade between two countries similar in factor endowments results in welfare gains for consumers in both countries. Contrast to that, opening trade is detrimental for residents of developing country if countries have big enough differences in factors endowments while consumers in developed country still gain from trade. This result arises due to high income inequality between two countries’ residents. The additional source of welfare losses in the developing country is the high production cost of imported commodities, which reduces their purchasing power for imported goods. Thus, market equilibrium with free trade is optimal only in the case of identical individual incomes between countries. Additional export regulations in the developing country may reduce differences in purchasing power between countries. Therefore, appropriate regulatory measures could result in reduction in income inequality which lead to gains from trade for consumers in both countries.
Citation: Kichko S., Ushchev P. (2017) Posledstviya otkrytiya torgovli mezhdu razvitymi i razvivayushchimisya stranami [The Consequences of Opening Trade between Developed and Developing Countries]. HSE Economic Journal , vol. 21, no 1, pp. 9-31 (in Russian)
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