Trade Liberalisation, Terms of Trade and Skill Formation in a North-South Model

This paper analyses a North-South model in which the Southern labour market is decomposed into skilled labour and unskilled labour. The skilled labour is an intermediate input produced with capital and unskilled labour. The South is a net receiver of foreign capital from the North. The terms of trade is endogenously determined and it plays an important role in determining the stock of skilled labour and the inflow of foreign capital in the South. Our study shows that a policy of trade liberalisation may deteriorate the terms of trade but it may increase the inflow of foreign capital and the supply of skilled labour. Moreover, we have also seen that a rise in the domestic capital formation may improve the terms of trade for the South.