Education, Innovation and Growth in Quality-Ladder Models of North-North Trade

This paper extends and surveys some basic quality-ladder models of education, innovation and trade in order to explain the dynamics of technological change and aggregate growth in developed countries. We analyze how the stochastic processes of innovation and export adaptation are affected by asymmetric factor endowments, transport costs, and barriers to entry in foreign markets. We show that the country-specific innovation rates are permanently increasing in the effectiveness of education and the countries’ relative endowment with labor. Trade liberalization leads to a temporary increase in the innovation rates but to a permanent increase in the rates of export adaptation.