Trade Specialization, Endogenous Innovation and Growth

Trade Specialization, Endogenous Innovation and Growth

In this paper, we develop a two-sector model of economic growth, in which both sectors can enjoy productivity growth by employing an ever-increasing variety of differentiated intermediate inputs. In contrast to many two-sector models of growth and trade, specialization in the “backward” sector is fully consistent with an output growth rate equal to the global output growth rate, even though such a country does no R&D and produces no intermediate goods. International trade improves the growth rate of all countries, but is especially beneficial for “backward” countries. These results support a more optimistic interpretation of the relationship between growth, technology and trade than other recent models also making a distinction between progressive and non-progressive sectors. (JEL Classification: F15, 041)