Monopolistic Competition and North–South Trade

Abstract

We examine the consequences of opening to international trade for a developing economy with open urban unemployment and rural-urban migration, where the urban sector is monopolistically competitive. We show that there exists a threshold level of urbanization prior to which increases in product variety will be reflected in increased urban unemployment, that opening to intra-industry trade with a high-wage economy (i.e., North-South trade) will reduce the rate of urban unemployment by a greater amount than intra-industry trade with a similar economy, and that trade intervention in the South may lower welfare by reducing varieties produced in the North.