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Time-intensive R&D and unbalanced trade

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  • Sauré, Philip

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.

Suggested Citation

  • Sauré, Philip, 2017. "Time-intensive R&D and unbalanced trade," European Economic Review, Elsevier, vol. 91(C), pages 229-244.
  • Handle: RePEc:eee:eecrev:v:91:y:2017:i:c:p:229-244
    DOI: 10.1016/j.euroecorev.2016.10.001
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    Keywords

    Unbalanced trade; Setup costs; R&D costs;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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