Gains and Losses from Trade when Countries differ in Public Knowledge Stocks

Following the insight from endgenus growth theory, we assume that countries with advanced production structures have high levels of public knowledge. The purpose of this paper is to analyze whether a developing country should trade with countries that are more or less advanced itself. We argue that it is particularly harmful to trade with advanced countries if international transaction costs are high and capital internationally immobile, in which case welfare may be higher in autarky than with trade. For low levels of transaction costs it may be most beneficial to trade with relatively advanced countries, in particular if capital is internationally mobile.