Working Paper: NBER ID: w3276
Authors: Robert Feenstra
Abstract: We consider trade between two countries of unequal size, where the creation of new intermediate inputs occurs in both. We assume that the knowledge gained from R&D in one country does not spillover to the other. Under autarky, the larger country would have a higher rate of product creation. When trade occurs in the final goods, we find that the smaller country has its rate of product creation stowed, even in the long run. In contrast, the larger country enjoys a temporary increase in its rate of R&D. We also examine the welfare consequences of trade in the final goods, which depend on whether the intermediate inputs are traded or not.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger country size (R12) | Higher rate of product creation under autarky (O49) |
| Trade (F19) | Slowed rate of product creation in smaller country (O39) |
| Trade (F19) | Temporary increase in R&D rate in larger country (O39) |
| Trade (F19) | Welfare outcomes (I38) |