An analysis of stability of the north-south growth model of trade: Saddle-path stability of the generalized grossman-helpman model with skilled and unskilled labours

This paper analyses the local stability of the steady state of the generalized Lai (1995) model, i.e. the Shimizu and Okamoto (2004) model. Lai is a modified version of Grossman and Helpman (1991a, 1991b: Ch. 11) by assuming that there are two types of labour: skilled and unskilled labours. Shimizu and Okamoto (2004) generalize the Lai model by assuming that Southern knowledge stock depends not only on Southern cumulative experience but also on the number of products the North manufactures. This paper shows that the stability of steady state in the generalized Lai model has the saddle point property. Thus, this paper also establishes the stability of the Grossman and Helpman (1991a, 1991b: Ch. 11) model.