Working Paper: CEPR ID: DP10452
Authors: Reto Foellmi; Sandra Hanslin; Andreas Kohler
Abstract: This paper presents a dynamic North-South general- equilibrium model where households have non-homothetic preferences. Innovation takes place in a rich North while firms in a poor South imitate products manufactured in North. Introducing non-homothetic preferences delivers a complete international product cycle as described by Vernon (1966), where the different stages of the product cycle are not only determined by supply side factors but also by the distribution of income between North and South. We ask how changes in Southern labor productivity, South's population size and inequality across regions affects the international product cycle. In line with presented stylized facts about the product cycle we predict a negative correlation between adoption time and per capita incomes.
Keywords: Inequality; International Trade; Product Cycles
JEL Codes: F1; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in southern labor productivity (J24) | Higher growth rate (g) (O40) |
| Increase in southern labor productivity (J24) | Higher imitation share (m) (C59) |
| Higher imitation share (m) (C59) | Shorter average time span for products manufactured in the North (L68) |
| Larger southern population (R23) | Higher imitation rate (L15) |
| Larger southern population (R23) | Potential increase in innovation share (O36) |
| Decrease in income inequality (D31) | Lower growth rate (O41) |
| Decrease in income inequality (D31) | Higher share of imitated products (L15) |