Equilibrium Technology Diffusion, Trade, and Growth
85 Pages Posted: 27 Jan 2015 Last revised: 7 Mar 2015
Date Written: January 2015
We study how opening to trade affects economic growth in a model where heterogeneous firms can adopt new technologies already in use by other firms in their home country. We characterize the growth rate using a summary statistic of the profit distribution—the mean-min ratio. Opening to trade increases the profit spread through increased export opportunities and foreign competition, induces more rapid technology adoption, and generates faster growth. Faster growth comes with costs: labor is reallocated away from production and fewer varieties are produced domestically. Quantitatively, these forces balance to produce large consumption-equivalent welfare gains from trade—especially along the transition path.
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