Economic growth and convergence with international differences in technology

Abstract

In the two-country world economy, this paper considers that factor markets are not perfectly competitive and technology changes endogenously. We analyze how differences in technology affect dynamic comparative advantages and thereby economic growth. The factor price equalization and the relative degree of input substitutions determine dynamics of comparative advantages and thereby resource competition in the factor markets. Both with and without the factor price equalization for input markets, critical values of a CES-index for the long-run R&D and consumption growth are derived. We show that competitiveness in the final good market stimulates economics growth, but excessive resource competition in the input and R&D markets can have a detrimental effect on economic growth. In particular, when the latter dominates the former, the trade liberalization does not necessarily stimulate economic growth. We also show the different convergence property for the R&D and consumption sectors: convergence of R&D and divergence of consumption.