Free mobility of capital and Labor force in a two-country model: The dynamic game for growth

Abstract

In this paper, we consider a two-country and two-sector economy, where firms can choose to be innovative or not innovative, and workers to be skilled or unskilled. Using a dynamic game, we argue that exploiting the comparative advantages a country has in producing goods that use the most abundant factor of production, free mobility of capital and labor is beneficial for economic growth. However, if a country has a comparative advantage in a sector that uses intensely unskilled labor (which is the case of several underdeveloped economies), a poverty trap may arise. For this reason we argue that national Governments must ensure the technological development to improve competitiveness and therefore a social optimal use of the comparative advantages.