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This paper addresses the dynamics of income inequality, both within and across countries. In an endogenous growth model with North-South trade, the dynamics of income inequality depend on the ability of workers to adapt to new technologies, captured by the quality of education. For developing countries with low quality of education, Southern trade liberalization leads to: an overall decline in effective human capital; an inverted U-shape transition of income inequality, where within country inequality increases in the initial periods following a reduction in trade barriers; and divergence in terms of average income in the short and long run.
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