The egalitarian predictions of the

The egalitarian predictions of the simplest
neoclassical models of trade and growth are
well known and easy to explain, as they
follow from entirely standard assumptions
on technology alone. Consider two countries
producing the same good with the same constant returns to scale production function,
relating output to homogeneous capital and
labor inputs. If production per worker dif-
fers between these two countries, it must be
because they have different levels of capital
per worker: I have just ruled everything else
out! Then the Law of Diminishing Returns
implies that the marginal product of capital
is higher in the less productive (i.e., in the
poorer) economy. If so, then if trade in
capital good is free and competitive, new
investment will occur only in the poorer
economy, and this will continue to be true
until capital-labor ratios, and hence wages
and capital returns, are equalize