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Consequences of North–South trade for affluent countries: A new application of unequal exchange theory

ABSTRACT Using a novel extension of unequal exchange theory, this study analyzes how international trade affects per-capita incomes and employment patterns in affluent countries. The study begins by demonstrating that workers in less-developed countries are significantly underpaid relative to their labor productivity, and that this outcome causes the monetary values of goods exported from these countries to underestimate the actual amount of labor inputs embodied within them. From this observation, it is hypothesized that North–South trade, unlike North–North trade, should increase per-capita incomes in affluent countries, while also reducing employment in their manufacturing sectors. Using a simultaneous equations model, the study compares this theoretical expectation to the actual experiences of 18 Organization for Economic Cooperation and Development (OECD) countries between 1970 and 2003. The results are generally consistent with expectations. The study concludes by discussing the theoretical implications of these findings.