A dynamic North-South model of demand-induced product cycles

Reto Foellmi, Sandra Hanslin and Andreas Kohler

Issue
2015-04

Pages
41

JEL classification
F1, O3

Keywords
Product cycles, Inequality, International trade

Year
2015

This paper presents a dynamic North-South general-equilibrium model where households have non-homothetic preferences. Innovation takes place in a rich North while firms in a poor South imitate products manufactured in the North. Introducing non-homothetic preferences delivers a complete international product cycle as described by Vernon (1966), where the different stages of the product cycle are determined not only by supply side factors but also by the distribution of income between North and South. We ask how changes in Southern labour productivity, population size in the South and inequality across regions affect the international product cycle. In line with presented stylised facts about the product cycle we predict a negative correlation between adoption time and per capita incomes.