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Comparative Advantage in Innovation and Production

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Abstract
This paper develops a multi-country, general equilibrium, semi endogenous growth model of innovation and trade in which specialization in innovation and production are jointly determined. The distinctive element of the model is the ability of the agents to direct their research efforts to specific goods, in a context of heterogeneous innovation capabilities across countries and contemporaneous decreasing returns to R&D. The model features a two-way relationship between trade and technology absent in standard quantitative Ricardian trade models. I calibrate the model using a sample of 29 countries and 18 manufacturing industries and quantify the importance of endogenous adjustments in technology. I find that endogenous adjustments in technology due to directed research can account for up to 52.8% of the observed variance in comparative advantage in production. In addition, the model suggests that standard Ricardian models overestimate the reductions in real income from increases in trade costs and underestimate the increment in real income due to trade liberalizations.

Suggested Citation

  • Mariano A. Somale, 2017. "Comparative Advantage in Innovation and Production," International Finance Discussion Papers 1206, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1206
    DOI: 10.17016/IFDP.2017.1206
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    References listed on IDEAS

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    Cited by:

    1. Bolhuis, Marijn, 2019. "Catch-Up Growth and Inter-Industry Productivity Spillovers," MPRA Paper 94730, University Library of Munich, Germany.

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    More about this item

    Keywords

    Trade; Innovation; Directed research; Quantitative models;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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