NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Hysteresis in the Trade Pattern

Gene M. Grossman, Elhanan Helpman

NBER Working Paper No. 3526
Issued in December 1990
NBER Program(s):   ITI   IFM

We study a world economy comprising two countries that may differ only in their prior experience in the research lab. Entrepreneurs in each country develop new technologies for varieties of a differentiated product whenever expected profits justify up-front research costs. Research productivity depends upon national stocks of knowledge capital, which accumulate in proportion to local research activity. The countries produce and trade their unique varieties of the differentiated good, as well as a homogeneous, "traditional" product. In this context, we ask whether a country can overcome a late start in research to develop a comparative advantage in the high-technology sector. We also examine the welfare properties of the equilibrium trajectory and of policies that might be used to reverse a country's fate.

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Document Object Identifier (DOI): 10.3386/w3526

Published: Theory, Policy and Dynamics in International Trade, W.J. Ether et al.,(eds.), (Cambridge, Cambridge University Press, 1993). pp. 268-290

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