Infrastructure, Human Capital and International Trade

This paper presents a general equilibrium model of trade and international capital mobility. Its special features are that productive sectors are differentially influenced by the provision of a public intermediate input or "infrastructure" and that there is an endogenous mechanism for converting unskilled into skilled labor. The "hi-tech" sector uses capital and skilled labor and the "traditional" sector uses capital and unskilled labor, which is also used for the public input and final public services. It is shown that a preference for private over public consumption, due either to consumer tastes or public policy, will lead an economy to have a comparative advantage in the "hi-tech" sector, higher wages, and a more skilled labor force.