A Two-Country Case: Eaton-Kortum Model with General Equilibrium : Technology Changes and International Trade

The aim of this paper is to analyze a two-country version of the Alvarez and Lucas (2007) model. In this model, each country has two production sectors with constant-return-to-scale: an intermediate goods sector and a final goods sector. Labor and intermediate goods are used as factors to produce both the final goods and intermediate goods. Production technology level of intermediate goods differs across goods when intermediate goods are at continuum. Intermediate goods can be considered as random variables drawn from a parameterized distribution. All the tradables are traded at the lowest prices. Here the technology level of intermediate goods production is given by the expression of both the absolute advantage and technology heterogeneity. And those random variables follow Frechet distribution with parameters λ and θ. Within this framework, I try to find out how the production technology level will affect international trade