North–South Model

The North–South model, developed largely by Columbia University economics

professor Ronald Findlay, is a model in developmental economics that explains the
growth of a less developed "South" or "periphery" economy that interacts through
trade with a more developed "North" or "core" economy. The North–South model
is used by dependencia theorists as a theoretical economic justification for
dependency theory.
Assumptions
The model makes a few critical assumptions about the North and the South, as well
as the relationship between the two.
 The Northern economy is operating under Solow-Swan assumptions while the
Southern economy is operating under Lewis growth assumptions. However, for
the purposes of simplicity of this model, the output of the traditional sector of
the Lewis model is ignored, and we equate output in the modern sector of the
South to total output of the South.
 The more developed North produces manufactured goods while the less
developed South produces primary goods. These are the only two goods.
 Both economies undergo complete specialization
 There are no barriers to trade, and only two trading partners
 Income elasticity of demand equals unity in both countries, so economic growth
results in a proportionate growth in demand.
 The South depends on the imported goods from the North in order to produce
its own goods. This is because the heavy machinery required for production of
primary products comes only from the North. The relationship is nonreciprocal,
however; the North does not depend on the South, since it can use its own
heavy machinery to produce manufactured goods.

Theory

The North–South model begins by defining the relevant equations for the
economies of each country, and concludes that the growth rate of the South is
locked by the growth rate of the North. This conclusion relies heavily on an
analysis of the terms of trade between the two countries; i.e., the price ratio
between manufactures and primary products. The terms of trade, are defined as

Page | 1
ToTs =Price of Primary Products/Price of Manufactured
products
ToTs Price of Primary Products or Price of
Manufactured products
Export
ToT

ToT*

Import

Volume of Trade
X*=M*

To determine equilibrium, we need only to look at the market for one of the goods,
as per Walras' law. We consider the market for the South's goods: primary
products. The demand for imports, M, from the South is a positive function of per
capita consumption in the North and a negative function of the terms of trade,
means relative price of primary products is high and less will be demanded). The
supply side comes from export of primary products by the South, X, and is a
positive function of the terms of trade and the South’s aggregate consumption of
primary products.

Page | 2
This graph makes it clear that the real terms of trade decreases when the growth
rate is higher in the South than in the North. The resultant decrease in the terms of
trade, however, means a lower growth rate for the South. This creates a negative
feedback cycle in which the growth rate of the South is exogenously determined by
that of the North. Note that the growth rate of the north, g n, is equal to n + m,
where n is population growth and m is growth of labor-augmenting technical
progress, as per the Solow-Swan model.

The conclusion, which fits in with dependency theory, is that the South can never
grow faster than the North, and thus will never catch up.

Relationship to import substitution theories

Economic theories such as the North–South model have been used to justify
arguments for import substitution. Under this theory, less developed countries
should use barriers to trade such as protective tariffs to shelter their industries from
foreign competition and allow them to grow to the point where they will be able to
compete globally.

It is important to note, however, that the North–South model only applies to

countries that are completely specialized; that is, they are not competing with

Page | 3
foreign markets – they are the only ones producing whichever good they are
producing. The way around the terms of trade trap predicted by the North–South
model is to produce goods that do compete with foreign goods. For example, the
Asian Tigers are famous for pursuing development strategies that involved using
their comparative advantage in labor to produce labor-intensive goods like textiles
more efficiently than the United States and Europe.

Page | 4