This paper extends the one commodity two sector dynamic model of Kiley (1999) introducing two different commodities to be produced in two sectors and introducing international knowledge spill over from the rest of the world to the home country and localized knowledge spillover from the more advanced modern sector to the less advanced traditional sector. We analyse the effect of opening of international trade on the skilled unskilled wage inequality in the long run equilibrium. We show that the relationship between the skilled-unskilled wage ratio and the skilled unskilled labour endowment ratio under autarky is ambiguous; and the nature of this relationship depends on the degree of consumer's indifference substitution between the two final goods. However, when international trade is opened, its effect on this skilled-unskilled wage ratio in the long run equilibrium depends not only on the degree of consumer's indifference substitution between the two final goods but also on the intensity of spillover effects as well as on the intercountry difference in factor endowments.