International relocation, difference in production costs, and welfare: An analysis based on a two-country model

► We incorporate the non-tradable goods sector into the two-country model with endogenous enterprise location. ► We examine the effects of an increase in productivity of the foreign non-tradable goods sector, the principal factor contributing to the international relocation of Japanese companies. ► An increase in the productivity of the foreign non-tradable goods sector improves Japanese income account. ► An improvement in Japanese income account enhances the welfare of Japan.