The effects of final and intermediate product innovation in a model of international trade

William Draeger Bosshardt, Purdue University

Abstract

Innovation is a scarce resource--in order for innovation to occur, a country must forgo something else. In the international trade literature, the sacrifice is usually in terms of inputs that could have been used in production. However, to imply that innovation depends on productive resources such as labor is dubious, since examples of labor rich countries that are not known for innovation can be readily seen in the world. The goal of this paper is to create a model where the opportunity cost of innovation is in terms of other innovation activities rather than production. Two types of innovation will be modeled--the innovation of new final goods and the innovation of new intermediate goods. Each type of innovation will provide benefit to the economy, and so each country must allocate scarce research resources between the two types of innovation. The first chapter develops a two-country, general equilibrium model, and finds the equilibrium amounts of final and intermediate goods when there is trade in: (1) autarky, (2) final goods only, (3) intermediate goods only, and (4) trade in both. In each case, when the final production process becomes more labor intensive, when consumers place more value on variety, or when the construction of intermediate goods helps the production process, the trade-off made between final and intermediate goods moves towards final goods. Analysis of the trade-off shows that only in the intermediate and full trade cases does factor abundance affect the trade-off. The second chapter examines the transfer of innovation technology from one country to the other and finds such transfers push a nation away from final product innovation and towards intermediate product innovation due to terms of trade effects. The third chapter develops a model in which technological change occurs in the form of increased productivity instead of the development of new goods. These results are compared to the results of the first and second chapter. Differences between these models, which represent the effects of variety, are then discussed. The final chapter introduces monopolistic competition into the model, and examines the effects of monopolistic competition on the trade-off.

Degree

Ph.D.

Advisors

Thursby, Purdue University.

Subject Area

Economic theory

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