The empirical literature on trade liberalization reflects two puzzles. First, the effect of trade liberalization on economic growth is ambiguous. Second, the effect of trade liberalization by developing countries on their income distribution is ambiguous. This paper attempts to explain simultaneously these two puzzles, based on a multiple-cone neoclassical growth model. The model shows that countries that are labour abundant in a global sense may see a rise in income inequality and a fall in per capita gross domestic product with liberalization if they are capital abundant in a local sense. The results suggest that the existence of multiple cones and the multiple steady states within the same cone, or the existence of global and local factor abundances, can be a possible explanation of these puzzles.
ASJC Scopus subject areas
- Economics and Econometrics