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Trade and the Composition of Growth

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  • Robert F. Kane

    (IUJ Research Institute, International University of Japan)

Abstract

This paper studies the relationship between innovation driven growth, distribution, and international trade. The model features two trade barriers: tariffs and distribution costs and three sources of growth: quality improvement, cost reduction, and product proliferation. This paper shows that distribution and manufacturing technologies have important interactions and are fundamentally linked. The distribution costs reduce the incentive to engage in cost reduction. Through this mechanism, trade has a compositional affect on economic growth. Tariffs affect both the extent of the market and the composition of the market. A reduction in tariffs increases market size and hence generates a temporary increase in quality growth and the entry rate. Because overseas sales are distribution intensive, the expansion of overseas sales drives a temporary reduction in manufacturing productivity growth. In contrast, if increased trade is driven by improvements to the distribution technology, both quality improvement and manufacturing productivity growth increase.

Suggested Citation

  • Robert F. Kane, 2021. "Trade and the Composition of Growth," Working Papers EMS_2021_03, Research Institute, International University of Japan.
    • Handle: RePEc:iuj:wpaper:ems_2021_03
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    References listed on IDEAS

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