The effects of final and intermediate product innovation in a model of international trade.

Innovation is a scarce resource--in order for innovation to occur, a country must forgo something else. In the international trade literature, the sacrifice is usually in terms of inputs that could have been used in production. However, to imply that innovation depends on productive resources such as labor is dubious, since examples of labor rich countries that are not known for innovation can be readily seen in the world. The goal of this paper is to create a model where the opportunity cost of innovation is in terms of other innovation activities rather than production. Two types of innovation will be modeled--the innovation of new final goods and the innovation of new intermediate goods. Each type of innovation will provide benefit to the economy, and so each country must allocate scarce research resources between the two types of innovation.