A ‘Technology Gap’ Model of International Trade

One of the most important trends in the world economy in recent decades has been the gradual erosion of the technological superiority of the industrial nations in general, and of the USA in particular. To this ‘closing of the gap’ may be attributed the decline of some traditional industries in the advanced countries; the increasing relative importance of high-technology products in the advanced countries’ exports; and the secular decline in US relative wages and the US real exchange rate. These effects on trade of technology and technological change are at the heart of the debate on international economic policy. Furthermore, there is widespread agreement on certain ways of looking at this issue — such as the common image of a ‘ladder’ of countries whose exports can be ranked on a ‘scale’ of goods — which suggest an implicit model shared by many observers. Yet this model has not been formalised. To a remarkable extent the treatment of technology in formal trade theory has failed to connect with policy concerns.