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Working Paper

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What are the impacts of free trade agreement on the social welfare of different groups of labor force in a developed country? What is the impact of free trade on a developed country 19s income disparity? What is the effect of free trade on the skill distribution of a developed country? The objective of this paper is to address the above questions in a simple two-sector general-equilibrium North-South trade model in which both countries produce one final good and one high-tech intermediate input. Horizontally differentiated skilled workers produce the high-tech intermediate input. The final good is produced with the use of a high-tech intermediate input and unskilled labor. Each country is populated by a continuum of unskilled workers with differential potential ability. Workers in the North and South can acquire skill by investment in training or education. Thus, skill distribution in the North and South is determined endogenously in the model through a self-selection. I characterize two different types of equilibrium: a closed-economy equilibrium without trade and free trade equilibrium. Then, I investigate the impact of free trade, in the presence of training costs, on the skill distribution within each country, income disparity, and social welfare.