Technological diffusion and dynamic gains from trade

Eleonora Cavallaro () and Marcella Mulino ()

MPRA Paper from University Library of Munich, Germany

Abstract: We consider a technologically backward country and analyse the implications on competitiveness and long-run growth of the quality content of traded goods. We build an endogenous growth model where quality improvements stem from research activity taking place in the R&D sector, and where the relative quality content of goods matter for export and import demand functions. We show that the possibility of an optimal growth with a balanced current account and no adverse terms-of-trade effects is closely related to the evolution of the country’s technological distance with respect to the trade partner: with an unfavourable quality-dynamics the country cannot engage successfully in “non-price” competition. Thus, long-run growth is coupled with an adverse export to import ratio, and a balanced trade requires a continuous offsetting fall in relative prices, either through devaluations or wage deflations. We then allow for international knowledge spillovers that increase the productivity of labour resources devoted to research in a way which is proportional to the technological distance between the countries. We show that the greater the country’s ability to absorb foreign knowledge and improve upon foreign technologies, the greater the gains in competitiveness, and the benefits to long-run growth. A numerical simulation confirms our findings.

Keywords: Vertical innovation; Technological change and catching up; Economic growth of open economies (search for similar items in EconPapers)
JEL-codes: F43 O33 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-cse, nep-int and nep-knm
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Published in Department of Public Economics Working Paper 117 (2009): pp. 1-20

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Related works:
Working Paper: Technological Diffusion and Dynamic Gains from Trade (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13793

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