A Schumpeterian contribution to the understanding of the volume and pattern of trade

The paper builds a theoretical multicountry model where Schumpeterian innovation and growth create asymmetric knowledge spillovers between industries, trade in intermediates, and trade in final output. The model predicts that countries converge in rates of growth but not in levels of per capita income.  Furthermore, differences in per capita income are driven entirely by differences in the distribution of entrepreneurs/industries cross nations.  The model is used to look at the two basic issues of trade theory; the volume of trade and the pattern of trade.  The volume of trade is shown to be consistent with a single point gravity equation.  The pattern of interindustry vs intraindustry trade is analyzed using the Grubel Lloyd index.  The prominence of intraindustry trade is shown to be a nonlinear function of the ratio of the proportion of world knowledge domestically generated to the domestic share of the world labor supply.  Intraindustry trade peaks as a percentage of total trade when this ratio equals one or when the domestic workforce is just large enough to meet domestic consumption and intermediate goods production needs for the domestic final goods sector and export.  The model is shown to be consistent with several key stylized facts from growth theory and trade theory.The model will be tested empirically using NBER World Trade Flow data (assembled by Robert Feenstra), Penn World Table data, and CEPII geodesic distance data, and USPTO utility patent data by country of origin.  An empirical examination of intraindustry trade will utilize a two way fixed effects longitudinal data model.