Does the Third World growth hurt the First World prosperity? By Paul Krugman

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In some points wage ratios of medium-tech goods is going to equalize in both regions and this is going to affect in a negative way.

With this we can see that the effect of Third World growth on the First World, which was negligible in our simplest model, becomes unpredictable once we make the model more realistic

The point of this model is that if a productivity growth in the Third world occurs would not hurt the First World because wages in the Third world stay low but because they rise, they will increase the prices of exports to advanced countries. It shows that productivity growth in Third World leads to higher wages in the Third World.

Model 3: Capital and International Investment

In this model there is two factors, Labor and Capital, but hey have different mobility. Labor is supposedly no mobile, bit there is an illegal immigration from South to North. Capital is totally mobile between the 2 regions.

Productivity of labor it depends of how much capital every worker has to work with, but if labor has less capital at its disposal, productivity and thus real wage rates will fall.

Also we suppose that Third World countries are more attractive to invest because a change in political conditions makes such investments seem safer or because technology transfer raises the potential productivity of Third World workers, this conditions attracts First World investors.

The point of this model is to show that investing in Third World countries raises their productivity, and we’ve seen in the first two models that higher Third World productivity per se is unlikely to lower First World living standards.

Model 4: The distribution of Income

In this model we suppose that there are two kinds of labor, skilled and unskilled, it is also suppose that the ratio of unskilled to skilled workers is much higher in the South than in the North.

The trade between the north and the south will give as a result the migration of skilled workers to the south, as skilled workers will be less in the north, the wages will be higher; and a migration of unskilled workers to the north will make wages to fall because of the abundance of unskilled workers.

Given this it can be inferred that as the trade between the north and the south grows, the inequality in wages will be bigger, this will also tend to factor price equalization as wages in the north decline towards the south levels.

With this evidence it can be assumed that trade between the First World and the Third is related with the rapid increased inequality in the advanced world, but the factor price equalization hasn’t been such a major element in the growing inequality in the United States because the trade with the developing countries is not really big in proportion.