TRADE, HUMAN-CAPITAL ACCUMULATION AND GROWTH IN AN UNDERDEVELOPED ECONOMY

This paper seeks to contribute to our understanding of the dynamic effects of trade, especially from a developing country's point of view. A model is constructed, in which a continuum of goods is produced using labor and human capital in different proportions. It is then examined how opening up trade changes the developing country's production structure towards labor intensive production and lowers the wage on human capital relative to the wage on labor. This, in turn, lowers the rate of human capital accumulation in the developing country. However, because of a favorable change in the terms of trade, the rate of growth may still rise as compared to the autarky level.