Date Added: Jul 2010
This paper considers a model of the world economy with a finite number of ex-ante identical countries and a continuum of tradeable goods. Productivity differences across countries arise endogenously through free entry to the local differentiated producer service sector in each country. It is shown that, in any stable equilibrium, the countries sort themselves into specializing in different sets of tradeable goods and that a strict ranking of countries in income, TFP, and the capital-labor ratio emerge endogenously. The equilibrium Lorenz curve is characterized by a second-order nonlinear difference equation with the two terminal conditions.