Production, Trade, and Migration with Differentiated, Skilled Workers.

A model is developed in which the output of one traded sector (e.g., high tech) is produced using consultan ts who supply differentiated skilled services. An external economy is shown to exist, which in turn implies (1) the suboptimal supply of s killed specialists, (2) multiple equilibria, and (3) disadvantages fo r small and/or late developing economies. Although the results indica te a positive role for subsidies, the model emphasizes the need to su bsidize the use, not training, of skilled specialists. The latter pol icy subsidizes foreigners through emigration.