A New Explanation of Heterogeneous Human Capital and Trade

Abstract

This paper constructs a simple two-sector, competitive trade model with heterogeneous labor and considers two countries’ differences in both diversities and means of human capital distributions. We prove that the distributions differences affect the comparative advantage through two channels including “the diversity effect” and “the mean effect”. When the diversity effect dominates the mean effect, the country will have comparative advantages in the S-sector, and hence will lead to an expansion in the S-sector, vice versa.