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The effect of technology choice on specialization and welfare in a two-country model

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  • Yukiko Sawada

Abstract

This study presents a simple two-country model in which firms in the manufacturing sector can choose a technology level (high or low). We show how trade costs and productivity levels affect technology choices by the firms in each country, where the fixed cost of adopting high technology differs between the two countries. This depends on the productivity level of the high technology. In particular, if the productivity of high technology is medium and trade costs are not too low, then a technology gap between countries arises. In this case, improving the productivity of the high technology country reduces the welfare level of consumers in the country in which low technology is adopted. To compensate for the welfare loss of the country from the technological improvement, trade costs should be reduced.

Suggested Citation

  • Yukiko Sawada, 2017. "The effect of technology choice on specialization and welfare in a two-country model," Canadian Journal of Economics, Canadian Economics Association, vol. 50(4), pages 1104-1129, November.
    • Handle: RePEc:cje:issued:v:50:y:2017:i:4:p:1104-1129
    DOI: 10.1111/caje.12288
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    JEL classification:

    • F10 - International Economics - - Trade - - - General

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