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Idea Flows, Economic Growth, and Trade

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  • Fernando E. Alvarez
  • Francisco J. Buera
  • Robert E. Lucas, Jr.

Abstract

We provide a theoretical description of a process that is capable of generating growth and income convergence among economies, and where freer trade has persistent, positive effects on productivity, beyond the standard efficiency gains due to reallocation effects. We add to a standard Ricardian model a theory of endogenous growth where the engine of growth is the flow of ideas. Ideas are assumed to diffuse by random meetings where people get new ideas by learning from the people they do business with or compete with. Trade then has a selection effect of putting domestic producers in contact with the most efficient foreign and domestic producers. We analyze the way that trade in goods, and impediments to it, affect this diffusion. We find that exclusion of a country from trade reduces productivity growth, with large long-term effects. Smaller trade costs have moderate effects on productivity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19667.

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Date of creation: Nov 2013
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Handle: RePEc:nbr:nberwo:19667

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  1. Boyan Jovanovic & Glenn MacDonald, 1993. "Competitive Diffusion," NBER Working Papers 4463, National Bureau of Economic Research, Inc.
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