Technology Advantage, Heterogeneous Talent and Trade

Abstract

This paper will setup a trade model to explore the impact of the diversity of talent distribution and the technology difference on the pattern of trade (POT) and income inequality of an economy. We find that not only the diversity effect but also the technology effect can matter for the pattern of POT. We demonstrate that, in the free-trade equilibrium, if the technology effect dominates the diversity effect then the country with a more (less) diverse distribution of talent may export the goods produced by a technology with supermodularity (submodularity). In addition, we prove that the relative technology difference will affect income inequality. If the technological advance for the submodular sector S is better than for the supermodular sector C, then income inequality would increase.

Technology advantage, terms of trade, and pattern of trade

“…Therefore, we prove that, against the existing results, a country with more (less) diverse human capital will export the goods produced by supermodular (submodular) technology when a combination of the terms of trade effect and the relative technology effect dominates the diversity effect. Apart from a similar argument that has already been analyzed in a small open economy model by Kuo and Lee (2018), the contribution of this study is that it uses a two-country model and considers the TOT effect. The trade volume of a big country is enough to affect the TOT and in turn affect the relative output.…”

“…Apart from a similar argument that has already been analyzed in a small open economy model by Kuo and Lee (2018), the contribution of this study is that it uses a two‐country model and considers the TOT effect. The trade volume of a big country is enough to affect the TOT and in turn affect the relative output.…”

“…There are two sectors in each country, namely sector C with supermodular production technology, and sector S with submodular production technology. The production process for each sector involves two tasks, x and v. Following Kuo and Lee (2018), we suppose that the complement is extreme, and hence the production function of sector C for country j can be represented as follows:…”

“…The production process for each sector involves two tasks, x and v . Following Kuo and Lee (2018), we suppose that the complement is extreme, and hence the production function of sector C for country j can be represented as follows: $$${F}_{C}^{j}({t}_{x},{t}_{v})=\frac{1}{{\gamma }_{C}^{j}}\,\min \{{t}_{x},{t}_{v}\},,$$$where task x is performed by a worker with talent t x and task v by a worker with talent t v . The variable $${\gamma }_{C}^{j}$$ represents the technology factor of sector C .…”

“…1 Diversity refers to the dispersion of skill, talent, or human capital across workers in an economy, as discussed in Kremer (1993), Grossman and Maggi (2000), Grossman (2004), andDas (2005). 2 Kuo and Lee (2018) set up a trade model to explore the impact of the diversity of talent distribution and the technology difference on the POT of a small open economy. They find that not only the diversity effect but also the technology effect can matter for the pattern of POT.…”