Growth and Trade: The North Can Lose

Several models of growth and trade concludethat a country grows more when trading with a less developedcountry. This article shows that this conclusion depends cruciallyon the assuming homothetic preferences and/or having just twogoods with respect to learning-by-doing. The article presentsa model where the more advanced country (North) can be worseoff after trading with a less developed country (South) becausethe demand pattern of the South is biased toward Northern productswith less learning-by-doing potential. Trade can worsen the welfareif the South is large with respect to the North and/or the preferencefor low-technology goods is high; necessary conditions are thatthe preferences are nonhomotheticity and that the North exportsat least two types of goods. In this context, the article studiesthe welfare of North and South, separating the static from thedynamic gains from trade.