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Technological diffusion and dynamic gains from trade

  • Cavallaro, Eleonora
  • Mulino, Marcella

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13793.

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Date of creation: Dec 2008
Date of revision:
Publication status: Published in Department of Public Economics Working Paper 117 (2009): pp. 1-20
Handle: RePEc:pra:mprapa:13793
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  1. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  2. Anthony Philip Thirlwall, 1979. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 32(128), pages 45-53.
  3. Sjak Smulders, 2004. "International capital market integration: Implications for convergence, growth, and welfare," International Economics and Economic Policy, Springer, vol. 1(2), pages 173-194, January.
  4. Robert A. Pollak, 1971. "Additive Utility Functions and Linear Engel Curves," Review of Economic Studies, Oxford University Press, vol. 38(4), pages 401-414.
  5. Eleonora Cavallaro & Marcella Mulino, 2007. "Vertical Innovation and Catching Up: Implications for Trade and Growth," Working Papers 75, Sapienza University of Rome, CIDEI.
  6. Krugman, Paul, 1989. "Differences in income elasticities and trends in real exchange rates," European Economic Review, Elsevier, vol. 33(5), pages 1031-1046, May.
  7. Abramovitz, Moses, 1986. "Catching Up, Forging Ahead, and Falling Behind," The Journal of Economic History, Cambridge University Press, vol. 46(02), pages 385-406, June.
  8. Sebastian Edwards, 1997. "Openness, Productivity and Growth: What Do We Really Know?," NBER Working Papers 5978, National Bureau of Economic Research, Inc.
  9. Miguel Leon-Ledesma, 2002. "Exports, Product Differentiation and Knowledge Spillovers," Studies in Economics 0206, School of Economics, University of Kent.
  10. Pack, Howard & Westphal, Larry E., 1986. "Industrial strategy and technological change : Theory versus reality," Journal of Development Economics, Elsevier, vol. 22(1), pages 87-128, June.
  11. Eleonora Cavallaro & Marcella Mulino, 2008. "Vertical Innovation and Catching-Up: Implications of EU Integration for CEECs-5," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(3), pages 265-279, August.
  12. Wolfgang Keller, 1999. "How Trade Patterns and Technology Flows Affect Productivity Growth," NBER Working Papers 6990, National Bureau of Economic Research, Inc.
  13. repec:kap:iaecre:v:14:y:2008:i:3:p:265-279 is not listed on IDEAS
  14. Michelle P. Connolly & Diego Valderrama, 2005. "North-South technological diffusion and dynamic gains from trade," Working Paper Series 2004-24, Federal Reserve Bank of San Francisco.
  15. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  16. Valerio Crispolti & Daniela Marconi, 2005. "Technology transfer and economic growth in developing countries: an econometric analysis," Temi di discussione (Economic working papers) 564, Bank of Italy, Economic Research and International Relations Area.
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