INCOME CONVERGENCE WITHIN AND BETWEEN COUNTRIES

We study how trade changes the rate of income convergence within and b etween countries in a model of endogenous growth. An externality in th e production of human capital implies that inequality slows down growt h under autarky. Eventually incomes converge, raising the growth rate. Trade accelerates (slows down) growth and the rate of income converge nce in the poor (rich) country. In the long run trade ensures that cou ntries grow at the same rate and that the ratio of their incomes tends to 1. Trade pattern reversals are possible since the initially wealth y country may be overtaken by the poor country.