Answer to Question #109026 in Macroeconomics for Helly

Question

It is observed that countries like the US invest in the research and development of new drugs, giving rise to monopoly like situation to their pharmaceutical industry when a new medicine molecule is innovated. This may continue for about five years. Later, during the next five years, pharmaceutical firms in countries like India either imitate this innovation or invest in similar research and development of substitute drug molecules. At the end of such time period, countries like India are in a position to produce a close substitute to the original medicine at a much lower cost. Production picks up over time and then the firms from the imitating country capture the international market.
Explain the process of international trade between innovating country and imitating country with an appropriate diagram, showing the timeline (in number of years) across various phases on the X-axis. Assume that each stage lasts for about five years.

Answer 1

The two countries move to higher indifference curves thereby obtaining potential gains from trade.However, the innovativing country enjoys both actual gains from economic growth and potential gains from trade.