Fragmentation, Engel's Law, and Learning

11 Pages Posted: 22 Jul 2005

See all articles by Ai-Ting Goh

Ai-Ting Goh

HEC Paris - Economics & Decision Sciences

Henry Wan

Cornell University - Department of Economics

Abstract

This paper outlines the conditions under which trade is beneficial for a developing country's growth. A developing country suffers from two disadvantages: low income and a comparative disadvantage in the production of modern manufactured goods - goods which allow a high rate of human capital accumulation through learning by doing. Low income together with Engel's law imply that developing countries consume and produce very few modern goods in autarky and hence grow slowly. With international fragmentation of production, a developing country may find comparative advantage in the production of some stages of modern goods despite an absence of comparative advantage in the production of modern goods under "100% local content". More resources can then be allocated to the modern goods sector leading to greater learning externalities and hence growth under free trade than in autarky.

Suggested Citation

Goh, Ai-Ting and Wan, Henry Y., Fragmentation, Engel's Law, and Learning. Review of International Economics, Vol. 13, No. 3, pp. 518-528, August 2005. Available at SSRN: https://ssrn.com/abstract=758624

Ai-Ting Goh (Contact Author)

HEC Paris - Economics & Decision Sciences ( email )

Paris
France
(33 1) 39 67 72 06 (Phone)
(33 1) 39 67 70 85 (Fax)

Henry Y. Wan

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

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