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, the North will specialize in goods with the highest economies of scale and the South in the remaining goods. A technical improvement in the South or a uniform technical improvement will make both countries better-off as long as the price of Southern goods falls. Likewise, a technical improvement in the North will lead to a welfare improvement in both countries without altering the pattern of comparative advantage.