Gradual Globalization and Inequality between and within Countries

This paper investigates the effects of gradual trade liberalization on intra-country and inter-country inequality. It assumes two countries, North and South, and two factors, skilled labour and unskilled labour. North is defined as the one that is relatively skilled-labour abundant and larger. A marginal trade liberalization from autarky is shown to (a) increase (decrease) in skilled-unskilled wage differential in the North (South) and (b) raise the inequality between North and South. As the global economy approaches free trade, a marginal trade liberalization has effects, which are the opposite of (a) and (b); that is, the relative wage falls in the North and rises in the South, and North-South inequality decreases