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Technological diffusion and dynamic gains from trade

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  • Cavallaro, Eleonora
  • Mulino, Marcella

Abstract

We consider a technologically backward country and analyse the implications on competitiveness and long-run growth of the quality content of traded goods. We build an endogenous growth model where quality improvements stem from research activity taking place in the R&D sector, and where the relative quality content of goods matter for export and import demand functions. We show that the possibility of an optimal growth with a balanced current account and no adverse terms-of-trade effects is closely related to the evolution of the country’s technological distance with respect to the trade partner: with an unfavourable quality-dynamics the country cannot engage successfully in “non-price” competition. Thus, long-run growth is coupled with an adverse export to import ratio, and a balanced trade requires a continuous offsetting fall in relative prices, either through devaluations or wage deflations. We then allow for international knowledge spillovers that increase the productivity of labour resources devoted to research in a way which is proportional to the technological distance between the countries. We show that the greater the country’s ability to absorb foreign knowledge and improve upon foreign technologies, the greater the gains in competitiveness, and the benefits to long-run growth. A numerical simulation confirms our findings.

Suggested Citation

  • Cavallaro, Eleonora & Mulino, Marcella, 2008. "Technological diffusion and dynamic gains from trade," MPRA Paper 13793, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:13793
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    References listed on IDEAS

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    1. Keller, Wolfgang, 2000. "Do Trade Patterns and Technology Flows Affect Productivity Growth?," World Bank Economic Review, World Bank Group, vol. 14(1), pages 17-47, January.
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    More about this item

    Keywords

    Vertical innovation; Technological change and catching up; Economic growth of open economies;

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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