Physics

Business

International trade

International economics

Stock (firearms)

Liberalization

Diffusion

Welfare

Counterfactual thinking

Epistemology

Engineering

Philosophy

Endogenous growth theory

Economics

Human capital

Comparative advantage

Market economy

Industrial organization

Mechanical engineering

Thermodynamics

American Economic Journal Macroeconomics

This paper provides a unified framework for quantifying the cross-country and cross-sector interactions among trade, innovation, and knowledge diffusion. This framework is used to study the effect of trade liberalization in an endogenous growth model in which comparative advantage and the stock of knowledge are determined by innovation and diffusion. The model is calibrated to match observed cross-country and cross-sector heterogeneity in production, innovation efficiency, and knowledge spillovers. The counterfactual analysis shows that a reduction in trade costs induces a reallocation of R&amp;D and comparative advantage across sectors. Heterogeneous knowledge diffusion amplifies the specialization effects of trade-induced R&amp;D reallocation, becoming an important source of welfare. (JEL F12, F14, O33, O34, O41)

Knowledge Diffusion, Trade, and Innovation across Countries and Sectors