Emphasizing the role of product quality in industrial specialization and in consumption, this paper shows that the degree of the division of labor is limited by the heteorgeneity of individuals' human capital, as well as by the extent of the market as argued by Adam Smith. In the international context. it explores the role of product quality in international trade and helps explain the observation that the bulk of the volume of international trade is among developed countries with similar endowments. Meanwhile, the model formalizes Linder's (1961) hypothesis that the similarity of de-mand for quality, which is largely determinded by the similarity of per capita income, plays a very important role in the international trade of manufac-tured goods. The extension of the model examines the dynamic effects of international trade and sheds light on the patterns of cross country growth. In particular, it provides an explanation for the trade induced rapid eco-nomic growth observed in some Asian countries.
Fan, C. S. (1995). The division of labor, product quality, and the pattern & the dynamic effect of international trade (CAPS Working Paper Series No.20). Retrieved from Lingnan University website: http://commons.ln.edu.hk/capswp/50