Scale economies, wage differentials, and North-South trade

This paper attempts to isolate the effect of external economies of scale in production on the pattern of North-South trade. The results show that when the relative wage is higher in the North and only the North innovates, the South produces and exports those goods with the lowest economies of scale, while the remaining set of goods is produced and exported by the North. Production subsidies offered by the South raise Southern income and welfare, but if the North introduces a new set of goods the benefits of the subsidies to the South dissolve.