Theorizing Wage Inequality in the Light of Globalization and Trade.

Date of Submission


Date of Award


Institute Name (Publisher)

Indian Statistical Institute

Document Type

Doctoral Thesis

Degree Name

Doctor of Philosophy

Subject Name

Quantitative Economics


Economic Research Unit (ERU-Kolkata)


Chakraborty, Brati Sankar (ERU-Kolkata; ISI)

Abstract (Summary of the Work)

Trade theory is the branch of economics that analyzes and aims to explain the interactions behind goods and services flows across national boundaries. Thus trade theory seeks to study the determinants and pattern of commodity exchanges across national borders, the consequences of such movements on the factors associated with the production of these commodities and the effects of various institutional interventions on these exchanges.The fast rate of growth of international trade (around 6 percent per annum for the past two decades (source: WTO)) and faster still, foreign direct investment and the progressive integration of economies at a formidable pace, calls for a deeper understanding of the subject to gain insightful knowledge about the causes and more significantly, the effects of these globalizing forces.1.1 Determinants and Pattern of TradeOne of the first theories that seek to answer the causes and pattern of trade flows is by David Ricardo. In his theory of comparative advantage, Ricardo posits the differences in relative factor productivities across countries as the driving force behind international trade. This theory predicts that a country that is relatively productive in manufacturing a commodity would specialize in the production of the commodity and export it. In this way this model explains the causation of trade in different products as caused by exogenously given differences in production costs across countries.The framework developed by Eli Heckscher and Bertil Ohlin (hereafter referred to as HOS) and supplemented by Paul Samuelson, Jaroslav Vanek and Ronald Jones among others, assumes away relative technological differences across countries but instead advances on differences in relative factor abundance to explain trade across economies. According to this formulation, when the production technologies of the manufactures exhibit differences in the relative factor intensities, a country that is relatively abundant in a particular factor will have, at autarky, a lower relative price for the good intensive in the use of the factor. Thus differences in relative endowments across countries generate price differences – an incentive to trade. According to this theory the country that is relatively more abundant in a factor will specialize and export those commodities that use the factor more intensively.As it turns out empirically, the theory of relative factor abundance explains a significant part of world trade and a wide array of observed verities did fit fairly well. But several empirical studies of trade conducted in the 1970’s and 80’s suggest that along with the forces of comparative advantage, intra – industry trade, defined as the exports and imports of characteristically similar goods, constitutes a large share of world trade (Grubel and Lloyd (1975)). Of the total volume of intra – industry trade, 80 percent consists of trade in vertical intra – industry trade while the rest is horizontal intra – industry trade (chapter 2 Rivera-Batiz and Oliva (2003)). Vertical intra – industry trade is defined as trade in similar but quality differentiated products that technologically differs with respect to the factor intensities whereas horizontal intra – industry trade refers to trade in differentiated products that have similar production technologies, are identical in quality and thus have same prices. It is in this realm where the standard neo – classical models employing a competitive market structure with constant returns to scale technology (hereafter referred to as CRS) fails to give us the cause of trade. Krugman (1979), (1981) and Ethier (1979), (1982) proposed the first formal models that could provide an explanation to the cause of intra – industry trade.Krugman’s (1979), (1981) line of argument rests on scale economies and consumers' taste for a diversity of products. According to this approach, on one hand, consumers satisfy their love for variety by consuming each and every variety that are available in the market and on the other hand increasing returns to scale technology (hereafter referred to as IRS) ensures a unique relationship between product variety and the manufacturing firm. Thus at trade, countries that are identical with respect to production technologies and factor endowments trade in similar goods (that are variety differentiated) as the firms of one country finds market for their goods in the other country while still reaping the benefits of scale economies by producing their commodity in one location – the country of their origin. One limitation of these models of monopolistic competition is that though these models predict a greater variety of export for the relatively larger country (in terms of endowments), which country produces and exports a specific variety is indeterminate in these models. This indeterminacy can be resolved with the incorporation of transport costs (Masahisa, Mori, and Krugman (1999), Neary (2001)) or in combination with the standard HOS relative factor abundance models (Helpman and Krugman (1987)).Likewise, the argument forwarded by Ethier (1982) replaces the love for variety in the demand structure of the consumers’ with international economies of scale and gains from specialization. In his model, the production of one of the final goods is organized with the help of differentiated intermediate goods that are produced under internal IRS. In addition to this the assembling technology used to manufacture the final produced good from the differentiated intermediates also exhibits scale effects in the number of the differentiated intermediates. This feature termed as international economies of scale, opens up gainful trade in intermediates even when the trading countries are perfectly similar. Ethier has also shown that with free trade in the intermediates, and the strength of the scale economies being not too strong, the pattern of trade as predicted by a standard HOS structure holds well.


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Creative Commons License

Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.



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