This project is a continuation of research by the investigator on the theoretical foundation of long run economic growth. Previous work emphasized bridging the gap between our microeconomic understanding of firms and industries on the one hand and our understanding of aggregate growth on the other. More specifically, aggregate growth theory is increasingly being forced to consider the large numbers of distinct goods that are hidden by the familiar univariate measures of capital or consumption. Once one begins to take seriously the enormous diversity of goods, one is inevitably lead to reexamine existing assumptions about how these goods interact with each other. Traditional aggregate theory makes the implicit assumption that these goods are functionally identical in the sense that there is an infinite elasticity of substitution between these goods. An alternative assumption is that the large variety of goods enter into production or consumption in a way that is additively separable. Virtually all of the work on aggregate economics falls into one of these two categories. This project develops new tractable mathematical models that can allow for many goods, for the introduction of new goods, and for complicated interactions between goods. The motivation for constructing models with richer sets of goods and interactions is to answer specific questions about technology, economic growth, savings and trade that can not be understood without this additional structure. This project uses models of technological change in the presence of many goods to address important and fundamental economic questions. These questions include the following: 1. Is technological change responsible for the divergence in the rate of growth of wages for skilled and unskilled labor that has been observed in the U.S.? Can technological change lead to stagnant or declining wages for unskilled labor? 2. Why is it that most trade takes place between countries at similar stages of development? 3. How can it be that savings rates are high, rates of consumption growth are high, and rates of return are low in some developing countries?
