joint with Nelson Lind

We develop a Ricardian model of trade in which countries innovate ideas that diffuse across the globe. In this model, the forces of innovation and diffusion combine to shape trade substitution patterns. Innovation makes a country technologically distinct, reducing their substitutability with other countries, while diffusion between countries generates technological similarity, increasing head-to-head competition. In the special case of an innovation-only model where countries do not share ideas, productivities are independent across space, and the demand system is CES. As a consequence, departures from CES reveal diffusion patterns. These theoretical results provide a direct connection between the dynamics of observable trade flows and the underlying dynamics of innovation and knowledge diffusion.

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