The Effect of Technology Choice on Specialization and Welfare in a Two-Country Model

This study presents a simple two-country model in which rms in the manufacturing sector can choose a technology level (high or low). We show how trade costs and productivity levels affect technology choices by the rms in each country, where the fixed cost of adopting high technology differs. This depends on the productivity level of the high technology. In particular, if productivity is medium and trade costs are not too low, then a technology gap between the countries arises. In this case, improving the productivity of the high-technology country reduces the welfare level of consumers in the country in which low technology is adopted. To compensate for the welfare loss of the country from the technological improvement, trade costs should be reduced.