Perfect Competition and Endogenous Comparative Advantage

This paper analyzes a dynamic, Ricardian model of international trade in which relative differences in technology are endogenously determined by investments in innovation by competitive firms. It considers the impact of these investments on trade patterns and the effect of trade patterns on rates of innovation and growth. The main result is that the dynamic effects of trade need not be positive when both countries specialize investments in the goods in which they have a comparative advantage. In addition, trade can lead to an inefficient pattern of specialization in innovation and have negative welfare effects