Equilibrium Technology Diffusion, Trade, and Growth

Equilibrium Technology Diffusion, Trade, and Growth

By Jesse Perla, Christopher Tonetti, Michael E. Waugh
May 2019Working Paper No. 3486

We study how opening to trade affects economic growth in a model where heterogeneous firms can adopt new technologies already in use by other firms in their home country. We characterize the growth rate using a summary statistic of the profit distribution—the mean-min ratio. Opening to trade increases the profit spread through increased export opportunities and foreign competition, induces more rapid technology adoption, and generates faster growth. Faster growth comes with costs: labor is reallocated away from production and fewer varieties are produced domestically. Quantitatively, these forces balance to produce large consumption-equivalent welfare gains from trade|especially along the transition path.