Dynamic increasing returns, technology and economic growth in a small open economy

Abstract

A two-final-good and knowledge-based growth model is constructed to study growth patterns in a small open economy. The source of growth is the introduction of new intermediate goods as a result of R&D, which in turn generates dynamic increasing returns in both the production of one final good and R&D. The results obtained in the model are consistent with intercountry differences in growth patterns. Depending on the technology level, a zero-growth equilibrium may appear. However, there exist some temporary policies that can help the economy take off. If the economy grows, the growth rate increases. Moreover, the share of the labor force employed by the constant-returns final-good sector decreases in the process of growth.