Growth and North-South Wage Gap

We study the sources of long-run growth and wage gap in a North-South (N-S) model with trade and foreign direct investment (FDI). Although R&D is the engine of global growth, increased share of R&D spending need not be accompanied by higher growth rate, and vice versa. Although, investment is induced by productivity growth, investment-output ratio need not rise monotonically with productivity growth. Lower investment-output ratio may accompany higher productivity growth, so higher growth rate need not entail lower share of consumption. We argue that existing models may exaggerate or under-estimate the role of R&D in growth. We also show that higher growth rate is normally accompanied by greater N–S wage gap in the long run. The effect of country size on wage gap is generally ambiguous, depending on the direction and magnitude of scale effects in R&D. Both FDI and S-N migration may increase global growth rate and N-S wage gap.