The model presented in this paper describes trade in goods between two countries endowed with three exogenous production factors: skilled and unskilled labor, and a stock of natural resource. The number of skills is an endogenous production factor that determines dynamic comparative advantages. Besides, one of the countries has a larger stock of resource. Final manufactured goods are exchanged in the bilateral trade for the raw material. The model shows that if returns on skills are decreasing development paths of the countries converge but the resource-abundant country ultimately specializes in exporting the raw material, no matter how it is developed initially. The resulting long-term effect of trade on household welfare is positive for the resource-scarce country and may be negative for the resource-abundant country. The latter is a loser if the external effect of skills on production is pronounced.
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