The North–South model, developed largely by Columbia University

Columbia University

Columbia University in the City of New York is a private, Ivy League university in Manhattan, New York City. Columbia is the oldest institution of higher learning in the state of New York, the fifth oldest in the United States, and one of the country's nine Colonial Colleges founded before the...

 economics professor Ronald Findlay

Ronald Findlay

Ronald E. Findlay is the Ragnar Nurkse Professor of Economics at Columbia University, New York. He joined Columbia in 1969 first as a visiting professor and was appointed a professor in 1970...

, is a model in developmental economics

Development economics

Development Economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example,...

 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

Dependency theory

Dependency theory or dependencia theory is a body of social science theories predicated on the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former...

.

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
  Exogenous growth model
  The neoclassical growth model, also known as the Solow–Swan growth model or exogenous growth model, is a class of economic models of long-run economic growth set within the framework of neoclassical economics...
  
   while the Southern economy is operating under Lewis growth assumptions
  Dual Sector model
  The dual-sector model given by Sir William Arthur Lewis winner of the Nobel Memorial Prize in Economics in 1979 is commonly known as the Lewis model, it is a model in developmental economics that explains the growth of a developing economy in terms of a labour transition between two sectors, the...
  
  . 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

Terms of trade

In international economics and international trade, terms of trade or TOT is /. In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports...

 between the two countries; i.e., the price ratio between manufactures and primary products. The terms of trade, , are defined as



To determine equilibrium, we need only to look at the market for one of the goods, as per Walras' law

Walras' law

Walras’ Law is a principle in general equilibrium theory asserting that when considering any particular market, if all other markets in an economy are in equilibrium, then that specific market must also be in equilibrium. Walras’ Law hinges on the mathematical notion that excess market demands ...

. 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, , (higher 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.
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 (because, thanks to unity in elasticity of demand, the export line would shift to the right faster than the import line). The resultant decrease in the terms of trade, however, means a lower growth rate for the South. This creates a negative feedback

Negative feedback

Negative feedback occurs when the output of a system acts to oppose changes to the input of the system, with the result that the changes are attenuated. If the overall feedback of the system is negative, then the system will tend to be stable.- Overview :...

 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

Technological change

Technological change is a term that is used to describe the overall process of invention, innovation and diffusion of technology or processes. The term is synonymous with technological development, technological achievement, and technological progress...

, as per the Solow-Swan model

Exogenous growth model

The neoclassical growth model, also known as the Solow–Swan growth model or exogenous growth model, is a class of economic models of long-run economic growth set within the framework of neoclassical economics...

.
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 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

Comparative advantage

In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

 in labor to produce labor-intensive

Labor intensity

Labor intensity is the relative proportion of labor used in a process. Its inverse is capital intensity....

goods like textiles more efficiently than the United States and Europe.