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Time-intensive R&D and unbalanced trade

Philip Sauré ()

European Economic Review, 2017, vol. 91, issue C, 229-244

Abstract: This paper highlights a novel mechanism that generates global imbalances. It develops a general equilibrium trade model with one of two countries having a comparative advantage in a sector whose production is characterized by (i) rapid, anticipated demand growth and (ii) large up-front R&D costs. International funding of the accruing R&D costs generates capital inflows in the R&D stage, which are balanced by subsequent outflows. Importantly, sector-level growth does not generate growth differentials between countries, typically regarded as rationales of global imbalances. Additionally, it is shown that a trade surplus can coincide with appreciations of the real exchange rate. I argue that Switzerland's trade surplus, which was driven to record heights during 2010–2014 by pharmaceutical exports, exemplifies this mechanism. Calibrating the model to Swiss trade flows underpins this argument.

Keywords: Unbalanced trade; Setup costs; R&D costs (search for similar items in EconPapers)
JEL-codes: F12 F41 (search for similar items in EconPapers)
Date: 2017
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