Technical Change in a Ricardian Model of North-South Trade with Increasing Returns to Scale

This paper examines the effect of a technical change on the pattern of North-South trade in the presence of increasing returns to scale in production. The model shows that if the North initially takes advantage of the economies of scale in advance of the South, the relative wage will be higher in the North and the North will specialize in goods with the highest economies of scale. A technical improvement in the South or a uniform technical improvement will make both countries better-off as long as the prices of Southern goods fall. The South however, can be made worse-off if it experiences a drop in external economies of scale. A technical improvement in the North will lead to a welfare improvement in both countries without altering the pattern of comparative advantage