International trade and the accumulation of human capital

Changes in the terms of trade affect both the incentives and the ability of individuals to purchase education in a credit-constrained economy. A model is developed that shows how individual decision-making is affected in a sm all economy when it opens up to trade. Empirical results indicate that cred it constraints are an important factor influencing school enrollment rates, particularly in low income countries. As a result, countries with low huma n capital stocks tend to increase their accumulation of human capital with increased trade. The response in high income countries is more muted.