Working Paper: CEPR ID: DP17385
Authors: Natalia Ramondo; Nelson Lind
Abstract: We develop a Ricardian model of trade in which countries innovate ideas that diffuse globally. The forces of innovation and diffusion combine to shape expenditure substitution patterns. Innovation makes a country technologically distinct, reducing their substitutability with other countries, while diffusion generates technological similarity and increases head-to-head competition. In the special case of an innovation-only model where countries do not share ideas, productivities are independent across space, and expenditure is CES. Consequently, departures from CES expenditure reveal diffusion patterns. Our theoretical results provide a mapping between the dynamics of observable expenditure and the dynamics of innovation and knowledge diffusion.
Keywords: innovation; diffusion; Poisson processes; Fréchet distribution; generalized extreme value; international trade
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| innovation (O35) | technological distinctiveness (O33) |
| technological distinctiveness (O33) | substitutability (L15) |
| knowledge diffusion (O36) | technological similarity (O33) |
| technological similarity (O33) | competition (L13) |
| knowledge diffusion (O36) | elasticity of substitution (D11) |
| idea sharing (O36) | productivity independence (O49) |
| deviations from CES patterns (C20) | diffusion processes (O33) |
| innovation (O35) | productivity correlation (O47) |
| diffusion (F22) | expenditure dynamics (E20) |