North-South Trades and Growth Miracles

This paper proposes a two-country 'economic' model (in the sense that it contains utility and profit maximization motives), in which a low-income economy enjoys a high growth rate relative to a high-income economy, thanks to importing technologies (or 'machines') invented in the high- income economy. Following Romer (1990), the growth of an economy is sustained by increasing varieties of inputs; while a high-income economy (and a closed economy) should invest in R&D to invent new inputs (or 'machines'), an open, low-income economy may trade with the high-income economy to import them, which reduces the cost of productivity advances. The model can generate the growth paths of the U.S. and the South Korea.