Economic integration and endogenous growth revisited: pro-competitive gains from trade in goods and the long run benefits to the exchange of ideas

Abstract

This paper re-examines the Romer [1990] "knowledge driven" endogenous growth model in an open economy setting. As an alternative to Rivera-Batiz and Romer [1991], we consider trade between two absolutely identical countries that are characterized by imperfect competition in one of the trade goods. Contrary to Rivera-Batiz and Romer [1991], we find that trade in goods without trade in ideas is detrimental to long run growth while trade in goods in conjunction with trade in ideas is good for long run growth. We further demonstrate that the pro-competitive gains from trade in goods is analogous to the analysis of imperfect competition by standard international trade theory.