In the two-sector learning-by-doing model by Grossman and Helpman (1990) with technological transfers and international trade, countries with a comparative advantage in fast growing industries will:
A) have permanently faster rates of growth than countries with a comparative advantage in slow growing industries.
B) have temporarily faster rates of growth than countries with a comparative advantage in slow growing industries, but the differences in growth rates will eventually disappear.
C) have temporarily faster rates of growth than countries with a comparative advantage in slow growing industries, but the differences in growth rates will eventually disappear and will become stagnant as technological transfers erodes profit margins of the fast growing industry/country.
D) None of the above.

Question

Quizplus · Accepted Answer

In the Grossman-Helpman model, countries with a comparative advantage in fast-growing industries will experience temporarily faster rates of growth due to learning-by-doing effects and the accumulation of knowledge. However, over time, these knowledge spillovers will lead to technological transfers to other countries, reducing the initial competitive advantage and eventually leading to convergence in growth rates. Therefore, option B is the most accurate. Option A is incorrect because it assumes permanently faster rates of growth, while option C is incorrect as it assumes stagnant growth rates, which is not a prediction of the model.

In the Two-Sector Learning-By-Doing Model by Grossman and Helpman (1990)