Intermediate Goods Trade, Technology Choice and Productivity

We develop a dynamic model of intermediate goods trade in which the pattern and the extent of intermediate goods trade are endogenous. We consider a small open economy whose …nal good production employs an endogenous array of intermediate goods, from low technology (high cost) to high technology (low cost). The underlying intermediate goods technology evolves over time. We allow for endogenous markups and consider the e¤ect of trade policy on both the intensive and extensive margins. The existence of trade barriers means that there is a nondegenerate range of intermediate goods that are nontraded. The ranges of imports, exports and nontraded intermediate goods, as well as the entire range of intermediate products used are all endogenously determined. The responses of these ranges, markups and productivity to domestic and foreign trade liberalization are then analyzed. Keywords: Intermediate Goods Trade, Technology Choice. JEL Classi…cation Numbers: D92, F12, O24, O33. Acknowledgment: Financial support from Academia Sinica and National Science Council (NSC 99-2410-H-001-013-MY3) to enable this international collaboration is gratefully acknowledged. Correspondence: Raymond Riezman, Department of Economics, University of Iowa, Iowa City, IA 52242; 319-335-1956 (Fax); [email protected] (E-mail).