Technological Progress, Terms of Trade, and Monopolistic Competition

This paper examines welfare implications of technological progress in the new trade model with monopolistic competition. Our result shows that labor-augmenting technological progress turns the terms of trade against the growing country while capital-augmenting technological progress shifts them in favor of the growing country. Unlike the Findlay–Grubert theorem, both technological progresses are welfare-enhancing. The key channel for this welfare effect is the love of variety in the new trade model.