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A Micro Founded Model in Which Trade Causes Higher Productivity Growth

Summary:
The division of labor is limited by the extent of the market. The model is a modified version of the simplified Romer 90 model. The modification is that there is a minimum efficient scale for the production of intermediate goods. Gross output in the growing sector is (sum i = 1 to N of x_i^alpha)L1^(1-alpha) where x_i is the amount of the ith intermediate good used. There is also another way to produce the final product 1 for 1 from labor output = L2. L1+L2 = L which is fixed. intermediate goods can be made from the final good one for one, but one must make at least one unit. There is a small closed economy with (alpha)(L^(1-alpha))

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The division of labor is limited by the extent of the market.

The model is a modified version of the simplified Romer 90 model. The modification is that there is a minimum efficient scale for the production of intermediate goods.

Gross output in the growing sector is (sum i = 1 to N of x_i^alpha)L1^(1-alpha) where x_i is the amount of the ith intermediate good used. There is also another way to produce the final product 1 for 1 from labor output = L2. L1+L2 = L which is fixed.

intermediate goods can be made from the final good one for one, but one must make at least one unit.
There is a small closed economy with (alpha)(L^(1-alpha))

Robert Waldmann
Robert J. Waldmann is a Professor of Economics at Univeristy of Rome “Tor Vergata” and received his PhD in Economics from Harvard University. Robert runs his personal blog and is an active contributor to Angrybear.

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