Trade, Technology, Income Distribution and Growth

Abstract

The standard Hecksher-Ohlin model predicts that trade liberalization leads to a decline in the rate of return of the scarce factor of production. However, the empirical evidence of the falling labor share in some developing countries contrasts with the theory. We show that if a simple change in technology is introduced into the standard model, conditions exist for the rate of return of the scarce factor of production to increase. In particular, the price of the exported good and the amount of capital the country owns can serve as determinants whether the rate of return of the abundant factor will increase.