Trade and growth in a two-country model with home production and uneven technological spillovers
We develop a two-country growth model distinguishing between a market sector producing services that can also be home-produced and a market sector producing goods without home-produced substitutes. The former is a technologically “stagnant” sector, while the latter is subject to learning by doing and technological spillovers. This distinction coincides in the model with the distinction between the sector producing non tradables and the sector producing internationally tradable goods. We study how differentials in labor tax rates across countries, which determine differences in the allocation of households’ time between market activities and home activities, influence also the mix of tradable and non-tradable goods that characterizes the market output of each country, thus affecting their bilateral trade balance and growth rates.
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