North-South trade and income inequality

This paper investigates the effects of North-South trade on international income inequality. While empirical studies suggest that trade liberalization encourages income convergence and reduces the per capita income gap between poor and rich countries, North-South trade is shown to increase the income gap between the two regions. On the other hand, trade liberalization by either region increases the welfare of both regions, and does not necessarily reduce the gap in “real income” or utility.